MOWAT RESEARCH #168 | AUGUST 2018

Inside the Black Blocks A policymaker’s introduction to , technology and the “Internet of Value”

BY MICHAEL CRAWFORD URBAN WITH DANIELLE PINEDA

MUNK SCHOOL OF GLOBAL AFFAIRS & PUBLIC POLICY Acknowledgements

The authors would like to thank those who participated in this research project as key informant interviewees and anonymous reviewers. A special thanks to Andrew Parkin, Sunil Johal, Kiran Alwani, Catherine Stinson and Reuven Shlozberg for reviewing the paper and for their helpful feedback, as well as Elaine Stam for going above and beyond in her design work for this report. Any remaining errors are the sole responsibility of the authors.

Authors

MICHAEL CRAWFORD URBAN DANIELLE PINEDA Practice Lead, Policy Intern Government Transformation Danielle worked at the Mowat Centre as a Michael joined the Mowat Centre as a Policy Intern from May to August 2017. She Policy Associate in January 2016 and took has also worked for Ontario’s Ministry of on the role of Practice Lead, Government Health and Long-Term Care, the Legislative Transformation in September 2017. He Assembly of Ontario and provided teaching brings a varied set of experiences to his and research support at the University of work at Mowat having worked at Global Toronto. She is currently a Policy Analyst at Affairs Canada in Ottawa – most recently AdvantAge Ontario. Danielle holds a Master as a Cadieux-Léger Fellow – with Elections of Public Policy and Honours Bachelor of Arts Canada and in the think-tank and NGO degree in Political Science and Media Studies sectors in Toronto and Ottawa. He holds from the University of Toronto. degrees from Queen’s University, Carleton University and the University of Oxford.

Disclosure: Michael Crawford Urban owns a small amount of and ether.

MOWATCENTRE.CA @MOWATCENTRE 439 UNIVERSITY AVENUE The Mowat Centre is an independent public policy think tank SUITE 2200, TORONTO, ON located at the Munk School of Global Affairs and Public Policy at M5G 1Y8 CANADA the University of Toronto. The Mowat Centre is Ontario’s non-partisan, evidence-based voice on public policy. It undertakes collaborative applied policy research, proposes innovative research-driven recommendations, and engages in public dialogue on Canada’s most important national issues. ©2018 ISBN 978-1-77259-068-5 Contents

Executive Summary 1

Introduction 5 1 A gap in the literature 6

What is a blockchain anyway? 8 2 Blockchain basics 8 Critical features 10 What problem is blockchain solving? 11 The “double-spend” problem 13 How blockchain works 14 What the ? 19 Why mine? 21

The first digitally native value system 24 3 Digital commerce 24 New forms of economic activity 30 The dimensions of the blockchain revolution 34

Potential uses by the broader public sector 42 4 Electronic health records 42 Professional and post-secondary credentials 43 Government permits, licensing and “verifiable claims” 44

Implications for public policy 49 5 Competition in “governance services” 49 Decreasing effectiveness of “negative” regulatory frameworks 54 Novel legal questions 55 Governance 57

Recommendations 61 6 Build internal capacity 61 Create an attractive environment for blockchain innovation 64 Support allied and internal experimentation 67 Make greater use of standards and other flexible tools 68 Foster national and global governance cooperation 69

Conclusion 73 7 Key takeaways 73 Blinded by the hype? 74 Is blockchain the most important innovation since the Internet, or an over-inflated hype-bubble that will soon burst? INSIDE THE BLACK BLOCKS EXECUTIVE SUMMARY » » » of atrueblockchain: We beginwithadiscussionofwhatblockchain actuallyisandhighlightthesixessential components of OntarioandtheCityToronto. a collaborative blockchain proof ofconceptconductedby theGovernment ofCanada,theGovernment own objectives. Throughout, alsodescribespotentialapplicationsofblockchain thereport andprofiles public policyaswellthepotentialthatexistsfor governments touseblockchain toadvance their explanation. Itdoessowithaneye tothesignificanceofblockchain anditspotentialapplicationsfor and anon-technicalbutstilldetailedanalysisofthe conceptsandphenomenathatunderpinthis This report fillsthisgapby providing anaccessibleyet rigorous explanationofhowblockchain works policymakers. Compounding thisproblem isthefactthatfew ofeithertypereport are targeted specificallyat obscures aspectsofthisinnovation. manyofthe mostimportant intimidate andconfusereaders withouttechnicalbackgrounds whilethe massofdetailthey provide the forest forthetrees by focusingtoonarrowly onblockchain’s technicalaspects.Theseaccounts of muchusetopolicymakers. Ontheother, piecesthatdoengageatadeeperlevel oftenend uplosing On theonehand,manyofthesepiecesare speculative toosuperficial, orinsufficientlyrigorous tobe reports andTwitter threads onthesubjectare oflimiteduse,foronetworeasons. learn more aboutit.Unfortunately, toomanyoftherapidlygrowing YouTube numberofarticles, videos, Fortunately, there ofinformationaboutblockchain isnoshortage available topolicymakers wishingto develop anunderstandingofthisnewtechnologyto guidetheirengagementwithit. growing interest inblockchain anditspotentialapplicationsmeansthatpolicymakers needtoquickly will soonburst?Eitherway, andeven ifthetruthliessomewhere betweenthesetwoextremes, rapidly Is blockchain innovation themostimportant sincetheInternet,oranover-inflated hype-bubblethat » » » Hosting oftheblockchain onadecentralized A The abilityof “write-only” design “write-only” multiple collaborators thatensures informationcan onlybeaddedtotheblockchain andnever deleted. tomake additionstotheblockchain. peer-to-peer (P2P)network .

1 | THE MOWAT CENTRE 2 | INSIDE THE BLACK BLOCKS is likely tohave impacts: itsmost important the twochannelsthrough whichblockchain blockchain’s emergence. To dothis,weanalyze and explore thefundamentalimplications of Building onthisexplanation,wealsoidentify surrounds it. cut through theubiquitoushypethatsooften about blockchain’s potentialandbeingableto critical tounderstandingthelarger debates understanding thesefoundationaldetailsis explain theprocess insimpletermsbecause works. Oftenglossedover inotherreports, we explanation ofhowablockchain actually We thenprovide anaccessibleandnon-technical » » » controlled by governments. Second,wediscuss as theprovision ofcurrencies, previously tightly inthemarket such to participate forservices, blockchain enablesamuchwiderrangeofactors in governance services “Issues toWatch.” Thefirstofthese, We usethisanalysistothenidentifyfourcritical government permitissuingandlicensing credentials and post-secondary such as potential usecasesinthebroader publicsector, Building ontheseideas,weexplore anumberof decentralization by enablinggreater » » » which manageit. recorded intheblockchain andofthesystems integrity andreliability oftheinformation The useof nodes maintainingitworktogether. blockchain’s software thatensures thatthe An proposed additionstotheblockchain. decisions onwhethertoacceptorreject by thenetworkforautomaticallyreaching The useofa incentive structure electronic healthrecords,professional cryptography distributed consensusmechanism inboththeeconomyandsociety. automation , focusesonhow integratedintothe toensure thesecurity, andgreater , aswell competition .

policymakers asthey respond toblockchain’s a setofpreliminary recommendations for After identifyingtheseissues,thereport offers themselves willneedtoevolve. governance Finally, weexaminethequestionofhow – suchashowtoregulate contracting.” “smart will likely create ahostof watch concernsthefactthatblockchain’s spread many oftheirpolicyobjectives. Thethird issueto that governments have previously usedto achieve activities– frameworks designedtoblockcertain many ofthe networks, may underminetheusefulnessof how blockchain, by empoweringindividualsand global governance cooperation Canada actively leadthefosteringof strongly recommend thattheGovernment of tools and otherflexibleregulatory approach that recommend thatgovernment take acollaborative such ascryptocurrencies, require regulation we benefits. Insofarasapplicationsofblockchain, the publicsectorcanaccessitspotential blockchain applicationssoastoensure that and alliedexperimentation and couldhelpgovernment support, first tworecommendations bothdependon, for blockchain innovation discuss howto entirely reliant onoutsideconsultants. We also abreast ofblockchain’s evolution andnotbe internal capacity arrival. Theseincludearecommendation tobuild ofblockchain technologyand negative regulatory frameworks negative regulatory makes greateruseofstandards build anattractive environment sothatgovernments canstay inCanada.These novel legalquestions withpotential onblockchain. . Finally, we internal national and – » » » identifying three key takeaways forpolicymakers: Informed by thisanalysis,thereport closesby what ishype. right questionsandseparatewhatisreal from prepared toengagewiththeseissues, askthe by thisnewtechnology, readers willbe better fundamental conceptsandquestionsraised hope that,given thisreport’s analysisofthe the future butwhichare notcovered here. We to blockchain that willgrow in inimportance Naturally, there are manyotherissuesrelated » » » it iscriticalforgovernment tounderstandand intelligence andtheInternetofThings. emerging technologiessuchasartificial will arisefromitsinteractionswithother The mostsignificantimplicationsofblockchain power. more even distributionofeconomicandsocial which couldhelpsecure greater privacy anda enable greater efficiencyanddecentralization a variety ofassets. coordinating informationsystemsandtracking innovations intermsoforganizingand other lessrevolutionary, butstillsignificant, Blockchain andassociatedtechnologiesoffer easily dotoday. thingsthatitcannot many newandimportant forms ofautomationby enablingsoftware todo the foundationforpotentiallyrevolutionary “digitally native value system.” Blockchain marksthearrival ofthefirst policy response. revolution whichwillrequire aholisticpublic of awiderandinterconnected technological engage withalloftheseinnovations aspart These implementationswill Thisinturnlays Thus,

3 | THE MOWAT CENTRE 4 | INSIDE THE BLACK BLOCKS caught flat-footed, caught flat-footed, To avoid being they operate. governments and how what this means for not do before and do that we could it enables us to of blockchain, what the basic outlines need to understand policymakers will 1 These are rough necessarilyvery estimates. ca.investing.com/crypto/currencies 3 Thisestimatewasmadeon25 July, 2018.See wiped-off--since-record-high.html https://www.cnbc.com/2018/02/06/bitcoin-price-over-550-billion- cryptocurrencies sincerecord highjustunderamonth ago.” 2 Kharpal,A.6February, 2018.“Over $550billionwipedoff 1 Thepaperhasbeenpreserved at records. vastly greater control over theirownhealth self-owning charitabletaxisandgivingpatients electricalgrids,enablingself-driving and smart diverse assecuringdigitalproperty, administering digital cashare beingsuggestedinareas as applications forthenewtechnologybeyond $300 billion. is, atthetimeofthiswriting,somewhere around assets capitalization ofallexistingcryptographic a subsequentmarket correction, themarket at more than$800billion(USD). 2018,wasestimated whose value, asofJanuary idea hasspawnedanewclassofdigitalassets identified, lessthanadecadelater, Nakamoto’s While Nakamotohasnever beenpublicly third intermediary. party as ablockchain asameansofenablinganelectronic payment systemthatdidnotrequire atrusted List. called Cryptography posted alinktopaperentitled On 31October, 2008,amysteriousindividual,orgroup ofindividuals,knownonlyasSatoshiNakamoto, INTRODUCTION 3 More thanthat,transformative 2 Inthispaper, Nakamotoproposed thecreation ofwhat wouldbecomeknown https://bitcoin.org/bitcoin.pdf foranupto dateestimate. 2 Bitcoin: APeer-to-Peer Electronic CashSystem Even with https:// . 1

CNBC . . lower-case bitcoin, weare referring to thecurrency. Bitcoin network,blockchain orsoftware protocol. Whenweusethe bitcoin. Whenweusethecapitalized Bitcoin,weare referring to the 5 Inthispaperwefollowacommon convention whenreferring to working-paper-2017-56/ Bank ofCanada. and UsageinCanada.” C. Huynh,K.andNicholls,G.December 2017.“BitcoinAwareness only 2.9percentofCanadiansactuallyownanybitcoin.SeeHenry, 2017 foundthat64percentofCanadianshave heard ofBitcoinbut 4 Research conductedon behalfoftheBankCanadainlate technology-driven testsfacedby governments in blockchain willoffer someofthemostsignificant andchallengesposedby the opportunities or thevalue ofabitcoin fails tofulfillitsproponents’ wildestclaims, This needstochangebecause,even ifblockchain to dowithBitcoin. having avague impression thatithassomething few understandthetechnologymuchbeyond citizens. Even forthosewhohave taken notice, screens –letalone thoseofmostaverage is stillabsentfrom manypolicymakers’ radar disruption inahostofindustries,blockchain digital assetsandthemassive potential for sector, theincredible growth inthemarkets for Still, despitethehugeinvestment inthis nascent https://www.bankofcanada.ca/2017/12/staff- Staff Working Paper 2017-56(English). . 4 toanobscure mailinglist 5 drops tonothing, The

5 | THE MOWAT CENTRE 6 | INSIDE THE BLACK BLOCKS and perhapscatalogueafew industriesthat impressionistic sketch ofhow ablockchain works practical use.Whilethey may provide abrief and insufficientlyrigorous tobeofmuch On theonehand,manyare toosuperficial of thesepiecesfallintoonetwocategories. is andhowitworks. specifically aimedatexplainingwhatblockchain videosandreports with explainerarticles, blockchain. Infact,theInternetisoverflowing There ofinformationabout isnoshortage A gapintheliterature for governments andhowthey operate. that wecouldnotdobefore andwhatthismeans outlines ofblockchain, whatitenablesustodo policymakers willneedtounderstandthebasic economy. To avoid beingcaughtflat-footed, foundational technologiesofthe21stcentury technology (DLT) willlikely represent someofthe (IoT), blockchain andrelated distributedledger intelligence (AI)andtheInternetofThings currently underdevelopment, suchasartificial of themosthighlytoutedtechnologicaladvances how they willlikely interactwithandenablemany century.the nextquarter Moreover, becauseof org/multimedia/what-blockchain International Governance Innovation (CIGI). Innovation. 4January, 2018. what-is-a-blockchain/ Review Editors. April23,2018. “Whatisablockchain?” 6 Somebetterexamplesofthese include:MIT Technology Review technical aspects.Theseaccountsintimidateand for thetrees by narrowly focusingonblockchain’s engage atadeeperlevel enduplosingtheforest Alternatively, manyaccounts thatdoseekto thatblockchainand opportunities willcreate. need tograpplesuccessfullywiththechallenges lack thedeeperanalysisthatpolicymakers will many are predicting willbedisruptedby it,they . https://www.technologyreview.com/s/610833/explainer- . Centre forInternationalGovernance 6 Unfortunately, toomany What isBlockchain? . https://www.cigionline. MIT Technology Centre for because withoutsuchaccountspolicymakers underpin thisexplanation.Thisisunfortunate analysis oftheconceptsandphenomenathat described andadetailedbutnon-technical will actuallycreate thechangesthatare being yet rigorous explanationofhowblockchain from boththesecategoriesisanaccessible The criticalmiddleground thatismissing reports are targeted specificallyatpolicymakers. problem isthefactthatfew ofeithertypethese significance forpolicymakers. Compoundingthis aspects ofblockchain thatare ofthegreatest obscures manyofthemosttransformational and themassoftechnicaldetailthey provide confuse readers withouttechnicalbackgrounds Everything Vigna, P. 2018. the GlobalEconomic Order of : HowBitcoinandtheBlockchain are Challenging of thistypethatexist.SeeVigna,P. andCasey, M.2016. 8 Itistruethatthere are someusefulbooklengthdocuments Governance its UseinthePublicSector.” A. 2018.“Blockchains Unchained:Blockchain Technology and 7 Anotablerecent exception: J.,Bourgery, Berryhill, TandHanson, existing policyresearch literature by providing squarely atfillingtheaforementioned gapinthe technical innovation. Thisthird sectionisaimed exploring thefundamentalimplicationsofthis The third sectionbuildsonthisexplanationby policy questionsdiscussedlateroninthereport. understanding neededtoengagethelarger will provide thereader withthebasictechnical explains blockchain inastraightforward way that explanation justdescribed.Thenextsection providing ofaccessibleyet thesort rigorous The present report aimstofillthisgap by avoiding itschallenges. presentedopportunities by blockchain whilealso policymakers willnotbeabletoseize the implications. Withoutsuchanunderstanding, blockchain required toappreciate itspotential will notbeabletodevelop theunderstandingof . NewYork: Press. St Martin’s . No.28. The Truth Machine:TheBlockchain andtheFuture of http://dx.doi.org/10.1787/3c32c429-en . NewYork: Picador. andCasey, M.and OECD Working Papers onPublic 8 The Age . 7 they willneedtocontinue theirexplorationofthis policymakers withthebasicintellectualtools issues thatitraises.Thus,ouraimistoprovide understanding ofthefoundationalconceptsand well astheinterested public–todevelop an forpolicy-anddecision-makersimportant –as or itsapplications.At thispoint,itismuchmore comprehensive initsdiscussionofblockchain Importantly, thisreport isnotdesignedtobe concluding thoughts. of blockchain andDLT. We alsooffer somebrief they considerhowto respond totheemergence high-level recommendations forgovernments as makers. The report closeswithaseriesoffive pose criticalquestionsforpolicy-anddecision- examination offour“IssuestoWatch” whichwill credentials. Thefifthsectionthenturnstoan records andprofessional andpost-secondary broader publicsector, suchaselectronic health explores anumberofpotentialusecasesinthe section Building ontheseideas,thefourth works, considerskippingdirectly tothissection. already knowwhatablockchain isandhowit foundational conceptsandimplications.Ifyou readers withanexaminationofblockchain’s grows inimportance. to asktherightquestionsaboutblockchain asit readers come awayin their with confidence ability success willbemeasured by theextenttowhich new technologywithconfidence.Ultimately, our radical newway thingsthathave ofdoingcertain represents acounter-intuitive andpotentially not “theeasiestthingtounderstand.” Blockchain, general understandingofblockchain isthatit one ofthereasons thatthere issuchapoor Finally, pointedout, asoneofourinterviewees consultations andjurisdictionalscans. reviews ofacademicandgrey literatures, informal sector orinrelated areas aswell extensive and thoughtleadersworkingintheblockchain academics,entrepreneurs,servants, practitioners involved withalmost20public interviews by theMowatCentre 2017.Ithas inJanuary on blockchain technologythatwasinitiated This report drawsonaresearch project focused government. and how“X”mightactuallyimpacttheworkof to cutthrough thehypeanddeterminewhether the questionsthey willneedtoaskbeable will do,wewantthereader tobeableask talking about“X”amazingthingthatblockchain policy context.Ultimately, whensomeonestarts technology thathasbeenlackinginapublic with theclearexplorationofblockchain head on,break itdownandprovide thereader In thepagesthatfollowwetacklethiscomplexity critical piecesofthepuzzle. come away from thisinteractionmissingsome as simpleoreasytounderstand,it’slikely you will done before. Ifanyone ispresenting blockchain cases, away ofdoingthingsthathave never been been donethesameway forcenturiesor, insome

7 | THE MOWAT CENTRE 8 | INSIDE THE BLACK BLOCKS 2 blockchains, howthey differ from Bitcoin,and focus insubsequentsectionstoexploringother is hasbeenestablished,wewillexpandour a basicunderstandingofwhatblockchain basic patternforsubsequentiterations.Once as thefirstblockchain ever created, itsetthe section isontheBitcoinblockchain because, do. For sake, simplicity’s thefocusinthis of whatthat“something”isanditcan In thissection,weprovide athorough account produced somethingthatwasmuchmore thanthesumofitsparts. however, isitsunique combinationofthesepre-existing elementsintoanovel configurationthat components ofblockchain existedfor years priortoitsinvention. Whatisinnovative aboutblockchain, innovation, thecreation ofblockchain didnotinvolve theinvention ofanythingnew. Infact,allthe Ironically, forsomethingsointimatelyassociatedwiththetechnologysectorandSiliconValley-style remain consistent witheachother. blockchain inaway thatensures allcopies record every transaction thatoccursonthe as thenodesofnetwork worktogetherto copy oftheledger. Eachcopy isregularly updated network independentlymaintains acomplete each ofthecomputersthatformanodeon peer-to-peer (P2P)networkofcomputersinwhich for thoseassets.Blockchains are operatedby a as anessentiallytamper-proof transactionhistory that liststheownershipofasetassets,aswell A blockchain is,fundamentally, adigitalledger Blockchain basics technology. how they have develop helpedfurther thisnew BLOCKCHAIN ANYWAY? WHAT ISA and invalidate newerblocks(seeFigure 1). with asdoingsowouldbreak theconnectionwith to thechain,earlierblockscannotbetampered ones ensures thatonceablockhasbeenadded of connectingnewblockstothechainolder block whichinitiatedtheblockchain. Thisprocess stretch alltheway backtothefirstor“genesis” blocks whichwere created earlierandwhich connectedtoa“chain”cryptographically ofother a techniquecalled“hashing,” thisnewblockis “sealed” intoanew“block.” Through theuseof confirmed asvalid, they are time-stampedand verified toensure theirvalidity and,ifthey are the sametime.Thisgroup oftransactionsisthen a numberofothertransactionspostedataround posted, thetransactionisgrouped togetherwith this transactiontothenetwork.Onceithasbeen into theledger, they must firstpropose, or“post,” When auserwishestoenternewtransaction which newtransactionsare addedtothisledger. Blockchains gettheir namefrom theprocess by How ablockchain works industries/financial-services/library/cryptocurrency-evolution.html 9 Source: PwC.September2015. copy ofthe blockchain. acceptable, eachnode adds thisnewblockto their transactions in the new block. If they are deemed Each nodeindependentlyverifies the validity ofthe these proposed transactions into a new block. consensus mechanism, onenodeverifies andseals transactions together. Using the network’s established The network gathers asetvolume of proposed transaction to the blockchain. Someone proposes addinga new FIGURE 1 5 3 1 Money isnoobject:Understanding the evolving cryptocurrency market. . of theblockchain. The proposed updateisnowapart entire network. The newblockisthenbroadcast to the operate the blockchain. computers, callednodes,that broadcast to aP2P networkof The proposed transaction is 2 6 4 PwC. https://www.pwc.com/us/en/

9 | THE MOWAT CENTRE 10 | INSIDE THE BLACK BLOCKS these technologiesare similartoblockchain, or of attractingfinancingandattention. with themuch-hypedtechnologyasameans actors seekingtoassociatetheirownofferings loose definitionofablockchain by avariety of has beenapurposefulblurringofthealready Further complicating matters is thefact that there recognize whatissospecialaboutablockchain. Based solelyonthisoverview, itcanbedifficultto Critical features node maintainingitare restricted invarious ways. blockchain, propose transactionsandactasa blockchains where theabilitiestoview also soughttocreate “private” or“permissioned” throughout thisreport,someinnovators have For avariety ofreasons thatwewillexplore ofeachandevery bitcoineverhistory created. it ispossibletotracetheentire transaction every transactionisrecorded ontheblockchain, implicationofthisisthat,because One important up asoneofthenodesthathelpstomaintainit. that anyone cantransactonitorsetthemselves that itcanbeviewedinitsentirety by anyone and is thatitpublicand“permissionless,” meaning featureAn important oftheBitcoinblockchain file/492972/gs-16-1-distributed-ledger-technology.pdf uk/government/uploads/system/uploads/attachment_data/ of theUnitedKingdom. Distributed LedgerTechnology: beyond blockchain 11 UKGovernment ChiefScientificAdviser. December, 2016. tea-rename-as-long-blockchain com/news/articles/2017-12-21/crypto-craze-sees-long-island-iced- Name to LongBlockchain.” December, 2017.“LongIslandIcedTea SoarsAfterChanging Its 10 For anextreme example,seeShapira,A.andLeinz,K.21 well asotherrelated technologies. DLT, abroader termthatcaptures blockchains as refer or insteadto“distributedledgertechnology” some have abandonedthetermaltogetherand extent towhichthetermblockchain iscontested, but differ incrucialrespects. Indeed,given the incorporate someofitscomponenttechnologies, https://assets.publishing.service.gov. Bloomberg . . https://www.bloomberg. 11 . Government 10 Manyof . or intermediary tomaintainthatledger.or intermediary While without theneedforatrustedcentralauthority immutable distributedledgerinreal time, and auditableversion control ofashared and first time,reliable, transparent, searchable Fundamentally, blockchain enables,forthe So, whatissoinnovative aboutblockchain? muddyingalreadyfurther cloudywaters. implications, broadening thefocustoomuchrisks is onunderstandingblockchain anditspotential an innovation. Given thatthefocusofthisreport neither asnovel, norpotentiallyasrevolutionary, DLT hassignificantpotentialofitsown,itis focus isonblockchain. Thisisbecause,while While DLT isdiscussedinthisreport, thecore features ofatrueblockchain. debates thatcurrently existandincisively captures thecritical working definitionthatside-steps manyoftheunhelpfultechnical independent research andbelieve thatthisrepresents arobust 13 We have arrived atthislistoffeatures through ourown ofthisfullpotential. short form oflessrevolutionary distributed ledgers,willsometimesfall possible –even ifactualimplementationofthetechnology, inthe technology withasfew qualifications,andwiththemostclarity, on blockchain asaway ofexploringthepotentialthisnew a blockchain, properly thispaperfocuses defined.Nevertheless, will actuallybeadistributedledgerthatgetsimplementedandnot 12 Thisisnotto say thatDLT asinmanycasesit isnotimportant » » features: blockchain ascombiningthefollowingsix of blockchain, there isnouniversally accepteddefinition » » remains accessibleontheledger. of theexistingrecord, theentirety ofwhich be changed,thesechangesrepresent updates the current stateoftheledgercancontinueto to beaddedtheledgerbutnotdeleted.While A additions. empowered toacceptordeclinetheseproposed the ledgerwithoutasinglecentralpoint/entity The abilityof “write-only” design “write-only” 13 multiple collaborators wefinditusefultodefinea thatallowsinformation towrite 12 » » » » of ablockchain. wedonottake Inthis report, this position. incentive structure thatemploys tokens isanessentialcomponent not really blockchains atallprecisely because they believe thatan 14 Somepuristswouldargue thatpermissioned blockchains are » » » » it ismanaged. recorded intheledgerandsystemsby which integrity andimmutabilityoftheinformation The useof variety ofincentives structures. “permissioned” blockchains employ agreater nodes canreceive asareward, whileprivate or usually takes theformofa“coin” or“token” that so. For publicblockchains like Bitcoin,this provide thecomputingpowerneededtodo that thenodesmaintainingblockchain Some formof to theledger. whether toacceptorreject proposed additions the networkautomaticallyreaches decisionson A entire ledger. possesses aregularly updatedcopy ofthe network The hostingoftheledgeronadistributed distributed consensusmechanism where eachfullnodeinthisnetwork cryptography incentive structure toensure thesecurity, 14 toensure by which P2P problem forshared ledgers.Commonly, shared Stated simply, blockchain solves acoordination revolutionary way. long-standing problem incomputer scienceina of blockchain technologyactuallyresolved a big dealbut,asisexplainedbelow, thecreation thisproblemsurface, may notseemlike sucha that blockchain wascreated tosolve. Onthe innovative, ithelpstounderstandtheproblem blockchain, andwhythey adduptosomething To understandthecapabilitiesenabledby blockchain solving? What problem is trusting community–but they canalso belabour relatively smallandknowntoeachother–i.e.,a Such systemscanworkwell whenagroup is changes before they are implementedinthefile. functions topropose, discussandagree on users to“trackchanges”anduse“commenting” like thiswillarise,forexample,by requiring such files that reduce the likelihood that problems users willoftendevelop systemsforhowtoalter or disagreements cancreep in.Correspondingly, make changestoasinglefileandwhere errors an applicationwhere multiplecollaborators can willing tolive with.GoogleDocsisanexampleof In somecases,theseare problems peopleare unnoticed, thuscorruptingtheledger. else wascheckingtheirwork,theerror wouldgo might make atranscriptionerror andsincenoone without realizing it.Alternatively, onecollaborator transaction thatanotherhadalready recorded one collaboratorcouldaccidentallyrecord a they are actingindependently. For example, coordinate theactionsofmultipleusers when infiltrating theledgerbecauseitishard to to confusionortamperingleadingerrors ledgers withmultiplecollaboratorsare vulnerable

11 | THE MOWAT CENTRE 12 | INSIDE THE BLACK BLOCKS coordination intrustlesscommunities isto A commonsolutiontotheproblems posedby block collaboration. into aserioussecurityproblem andcaneven difficulties canmutatefrom asimplenuisance these trustlesscommunitiesthatcoordination potentially seekingtodefraudothers.Itisin to addincorrect informationtotheledgerand malicious userswhoare purposefullyseeking honest errors, mustnowalsoguard against expands. Users,whomuststillguard against each other–thenumberofpotentialproblems of anonymoususersornotknownto communities –theaforementioned communities errors outoftheledger. In“trustless” coordination problems are aimedatkeeping tosolve In trustingcommunities,efforts one anotherbegintoparticipate. when anonymoususersandnotknownto can quicklybreak downwhennumbersgrow and such systemsare subjecttohumanerror and are notwrittenintotheapplication’s software, they humanactionsand dependonvoluntary and coordinate properly. Moreover, because intensive andtime-consumingtoimplement sometimes attempted intrustingcommunitiesas well. 15 For thesake ofefficiencyandconvenience, thissolutionis utilize thespecialinformationitpossesses to If fraudissuspected,the card companywill and anewdebittothecardholder’s account. a newcredit isaddedtothemerchant’s account, credit. Ifalliswell,thetransactionaccepted, determine ifthecardholder possessessufficient transaction toseeifitappearsfraudulentand to thecard company. Thecompanyreviews the terminal thattransmitstheproposed transaction a transactionwithmerchant andenteritintoa companies represent anexample:you agree to special powerstooversee theledger. create andgive a“trusted”intermediary them 15 Credit card authority toovercharge users.Manybelieve that central authoritycreates forthat anopportunity The grantingofspecialrightsandprivilegestoa Gouging intermediated systemscreate, including: – there are anumberofdrawbacksthatsuch refunds fordefraudedcardholders forinstance While there are benefitstosuchasystem– cardholder. to reverse thetransactionandreimburse the company willuseitsauthorityover theledger If thetransactionisdeemedfraudulent,card directly contactingthecardholder forinstance. confirm whetherthetransactionisvalid –by secretly altering therecords that they maintain. individuals’ titletotheirlandby destroying or processed, andadministrators may steal administrators inorder togettheir transactions problem asindividualsmay needtopay bribes to without astrong ruleoflawoftenconfront this provides them.Landregistries incountries advantage oftheprivilegesthattheirauthority corrupt individualsandorganizations totake Systems thatcentralize authorityenable Corruption credit cards atall. payments andwhysomeeven declinetoaccept small businessownersprefer cashordebit of howthesefees eatintotheirprofits thatmany sizeable profits from thisbusiness.Itisbecause involved inatransactionandare abletomake fees from boththecardholder andthemerchant and pointtothefactthatthey are abletoextract credit card companiesandbanksdojustthat data are especiallyattractive tohackers because location ordatabase.Thesecentralized stores of to large accumulationsofdataheldin asingle called “honeypots.” Thetermhoneypots refers that centralize authority–alsocreates whatare data –somethingoftenassociatedwithsystems Centralization, specificallyofstorageusers’ Honeypots everyone’s accesstotheirshared document. Google Docsdownthereby temporarilyblocking by acyber-attackornaturaldisaster, thiscanshut storage isthatifGoogle’s are servers taken offline by Google.Theresult ofthiscentralization updated version ofthedocument ismaintained shared filesfrom anywhere intheworld,asingle Google Docsmay beabletologonandedittheir of justsuchafailure. network inEurope provides arecent example single place.The1June,2018crashoftheVisa information isstored by, asingleentityorin a when avitalsystemisoperatedby, orcritical are called“singlepointsoffailure.” Thesearise structural problem, namelythecreation ofwhat Centralization alsogeneratesamore fundamental Single pointsoffailure 18 Arecent exampleistheSeptember2017 Equifax databreach. point offailure problem –forexample,shouldGooglegobankrupt. controlled by asingleentity, they are stillvulnerableto thesingle problem by backingupfiles,butinprinciple,becausethesefiles are 17 Itistruethatcompanieslike to Googletry alleviate this crashes-and-sparks-payment-chaos?CMP=Share_iOSApp_Other www.theguardian.com/money/2018/jun/01/visa-card-network- system returns to fullcapacityaftercrash.” 16 Collinson,P. andagency. 2June,2018.“Visacard payments problem thatisbecoming increasingly common. breaches, even from highlyprotected databases,a of dataoftenendsupresulting inmassive data these stores’ defences. Thus,thisconcentration andresourcessignificant effort tobreaching makes forthehackers itworthwhile todevote of theirimmensesize andpotentialvalue. This 16 Similarly, whileusersof The Guardian . https:// 17 . 18 The “double-spend” context ofatrustlessworld. solution forashared ledgerwasimpossibleinthe blockchain, implementingsuchadecentralized solution inprinciple,priortotheinvention of another copy. them offlinecannotstopusersfrom accessing multiple copiesoftheledger, thentakingoneof authority, itcannotbecomeabusive; ifthere are independent entities.Ifthere isnocentral question are stored indifferent placesby different multiple redundant copiesoftheinformationin system where there isnocentralauthorityand to decentralize thesystem,thatis,create a One obvious solutiontoalltheseproblems is related formofthisproblem here. explanation asclearpossible,we concentrateonthecurrency- transposed to otherformsofledgersaswell.Inorder to make the the contextofadigitalcurrency, butthesameproblem canbe 20 Thedoublespendproblem ismosteasily understandablein attractive targets for hackers. forthesystemto function.Thismakesnecessary themmuchless of datainthecopiesshared ledgersto theabsoluteminimum 19 Notethatdecentralized systemsalsotendto limittheamount everyone ownsandowes.Whensomeonewants for acentralized ledgerthatkeeps trackofwhat avoid bearers ofvalue altogetherandoptinstead way togetaround thisproblem, however, isto Counterfeiting issimplytoobigaproblem. One coin oradollarbillactsinthephysicalworld. bearing digitalfilesthatacttheway aphysical at lowcost–itisnotpossibletocreate value- good atmakingmillionsofthesecopies also very computers are goodatcopying very things–and of money whichwewillcalla“token.” Because of adigitalcurrency andimagineadigitalunit problem, considertheproblem inthecontext problem. one hadbeenabletosolve the“double-spend” solve thisproblem previously wasbecauseno The biggestreason whynoonehadbeenableto problem 20 To understandthedouble-spend 19 But,whileanobvious andsimple

13 | THE MOWAT CENTRE 14 | INSIDE THE BLACK BLOCKS removing re-introduces theintermediary the The problem thatthiscreates, however, isthat position. entity wouldbeabletoexploitaprivilegedcentral operate theledger, thereby ensuring thatnosingle authority. Instead,adecentralized networkwould payments, buttodosowithoutacentralized that card companiesusetoenableelectronic ofledgers functional equivalent of thesorts blockchain represents anattempttocreate a to rely onanintermediary. fact thatsuchapayment systemrequired them and itsearlyadopterswere unhappy withthe a variety ofreasons, theinventor(s) ofBitcoin the ledgerandkeep trackoftransactions.For if there tomaintain isatrustedintermediary As already discussed,thissolutionworkswell millilitre. of somethingyou possess,like akilogramor coin andmore like aunitformeasuringhowmuch becomes lessanalogoustoaphysicalthinglike a to someoneelse’s. Inthisscenario,atoken ledger toshiftsometokens from theiraccount Instead, they simplynotifythekeeper ofthe to make apurchase, they don’t exchange tokens. Casey, M.2016. to profit from theirmanagementoftheledger. SeeVigna,P. and of theirprivilegedposition–a thatalsoenabledthem the managersofexistingledgers, suchasbanks,enjoyed because enabled inthephysicalworldand they resented thepowerthat funds digitallywiththesamelevel ofanonymityandeasethatcash 21 Bitcoin’s creator(s) seemto have wantedto beable to transfer the network. multiple copiesoftheledgerdistributedaround different transactionsfortheirfundsintothe the samefundsmore thanonceby entering ensure thatmalicioususersare notabletospend central ledger, thisnetworkneedsanew way to to coordinate theupdatingofauthoritative form. Withoutacentralauthorityempowered double-spend problem, albeitinadifferent The AgeofCryptocurrency 21 Thus,theBitcoin . Chapter2. of ashared ledgerby adecentralized network a systemforcoordinating themaintenance Blockchain’s key innovation liesinhowitcreates How blockchain works manages todoso. problem; blockchain’s key innovation liesinhowit blockchain, noonehadbeenabletosolve this accepted. Priortothecreation oftheBitcoin from illegitimateonesandonlylegitimate legitimate transactionscanbedistinguished reconciled inaway thatreliably ensures that of theledgerremain consistentandare regularly to findaway toensure thatallthevarious copies In otherwords, anydecentralized systemneeds well asthehelpful commentsofouranonymousreviewers michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/ as protocol actuallyworks.” offered atNielsen,M.6December, 2013.“HowtheBitcoin this paper, wehave relied onthehelpfulandaccessibleexplanation 22 For thissection,andmanyofthe othertechnicalaspectsof like adiamondthathasbeenregistered ona the transfer ofownershipa physicalasset ownership ofadigitalassetlike abitcoin to of transaction,rangingfrom thetransfer of principle, thisinformationcanrecord anysort of informationapre-determined size. In comprise theledger. Ablockissimplyapackage sealed andaddedtothechainofblocksthat of transactioninformationistime-stamped, blockchains are updatedwhenanewblock impossible task? How doesblockchain accomplishthispreviously consistency. timely mannerandinaway thatensures their the networkcanbereliably updatedina such thatallthecopiesofledgeracross 22 We explained earlierthat DDI: Data-driven Intelligence . http://www. . by simplytellingthemthecombinationand that you have succeededinsolvingtheproblem combination, itiseasytoprove tosomeoneelse combination oneatatime. everyopen acombinationlockby possible trying brute force to computation,issimilartotrying This “guessandcheck”approach, alsocalled see ifthatnumberproduces thecorrect answer. guessing anumberandrunninganequationto There isnoway tofindthenonceotherthanby happens tosolve adifficultmathematicalpuzzle. guess arandomnumber–calledthenonce–that in whicheachnodestrives tobethefirst various nodesthatmake uptheBitcoinnetwork is essentiallyacompetitionheldbetweenthe a techniquecalled“proof-of-work” (PoW). consensus mechanismthatisusedbasedon In thecaseofBitcoinblockchain, the ledger. mechanism isthenusedtoaddthisblockthe and theblockchain’s distributedconsensus are validated andgrouped togetherintoablock to theblockchain’s network.Theseproposals – i.e.,make atransaction–they announceit users wanttomake anadditiontotheledger blockchain. this comparison. 25 Theauthorswouldlike to thankMattJacksonfor suggesting security ofthesystem,asweexplain below. on top ofbeingaconsensusmechanism,italsoensures the functionsintheBitcoin blockchain:24 PoW two necessary serves transfer muststillbeeffected inthephysicalrealm. the transfer, whenrecording thetransfer ofaphysicalassetthat of bitcoinontheBitcoinblockchain actuallyeffects andcompletes and physicalassets,however, isthatwhilerecording thetransfer of-the-blockchain for theblockchain.” 23 Volpicelli, G.8June,2016.“Beyond bitcoin.Your life isdestined of thecompetitionactuallyfoundnonce. other nodescanchecktoensure thatthewinner having themtestitthemselves –whichishow 23 . Thebigdifference betweentransferring digital Theway thisworksisthatwhen Wired . http://www.wired.co.uk/article/future- 25 Andjustlike witha 24 PoW nodes thatdoitare called“miners.” computational work–iscalled“mining”andthe inthiscompetition–i.e.,engaging part set numberofnewbitcoinsfordoingso.Taking that winsthecompetitionisrewarded witha thistaskbecausethenode compete toperform (see Box 1).Thevarious nodesonthenetwork updates andattachittotherest oftheblockchain enables themtosealthenextblockofvalidated keyable touseasaspecialcryptographic that the nonceitselfwhichwinningnodeisthen The prize forwinningthecompetitionisactually automated process. described belowwouldinvolve humaninterference withanormally it isstillworkingproperly. Thatsaid,thepotentialdeviations to dothemining–andperiodicallycheckingonitto make sure up amining“rig”–thecomputeror networkofcomputersused involvement inthemining process isnormally limitedto setting 26 Notethatallofthisactivityoccurs automatically. Human 26

15 | THE MOWAT CENTRE 16 | INSIDE THE BLACK BLOCKS the Bitcoinnetwork.The“hashrate” ofthenetworkisameasurehowmuchcomputingpower required isautomaticallysetby theBitcoinsoftwareandvaries dependingonthe“hashrate” of withaspecificnumberofzeros. Thespecificnumberofzeros will generateahashstarting added tothetransactionsinproposedblockandhashedusingSHA-256hashfunction, constitutes miningisactuallyacompetitiontoguessnumber(calledthenonce)that,when In theBitcoinblockchain, hashingplays acriticalrole.Thenumberguessingcompetition that will beunabletodeterminewhatthatunderlyinginformationactuallyis. only havedetermine ifthepersonwhogenerateditdoesaswell,whileyou thehash itself,you itself. Thus,ifyou have accesstotheunderlyinginformation usedtogenerateahash,itiseasy to dotheinverse inspectingthehash andfigureoutwhattheunderlyinginformationissimplyby to applythefunctionapieceofinformationandgeneratehash,itisessentiallyimpossible purposes.Whileitiseasy usefulforcryptographic other commondigitalapplications–arevery Bitcoinbutalsomany Second, somehashfunctions–suchasSHA-256,thefunctionusedby unpredictably differentstringofcharacters. that textandthenhashingtheagainwouldresultingenerationofanentirelynew eventhe resultoftextabookbeinghashed,simpleactremoving asingleperiodfrom change intheinformationfromwhichthey weregenerated.For instance,ifthehashabove was First,hashesareextremelysensitive toany properties. because they possessafewimportant Hashing isacommonlyusedtechniqueincomputerscienceandcryptography. Hashesareuseful piece ofinformationintoanalphanumericstringcharacterslike this: a Hashing isatermthatreferstotheuseofanalgorithm–calledhashfunctionconvert actually works.” actually work?” 28 bitcoin/block_time/all?f=m10&t=l 27 Inreality, the average timeperblockhasbeenslightly below10minutesformostofBitcoin’s history. See invalidating thehashesofsubsequent blocksandbreakingthechain. underlying informationofthehashblock in whichthistransactionwasrecorded,thereby Any attempttogobackintimeby tamperingtherecordofhistoricaltransactionswillalter the informationthatproducesnextblock, Bitcoinmakes itselfessentiallytamper-proof. in thisway, of namelyhashingall theinformationinablockandthenusingthishashaspart information fortheblockbeingsealedandhash oftheprecedingblock(seeFigure2).Itis Once thenoncehasbeenguessedcorrectly, itisthenhashedagainalongsidethetransaction maintain anaverage betweenblockcreationofabout10minutes. interval automatically varies thedifficultyofcompetitiondependingonnetwork’shashratesoasto pointintime.TheBitcoinsoftware is beingdevoted tomaintainingthenetworkatthatparticular Hashing BOX 1 For amore detailedexplanationofhashingsee3Blue1Brown. 7July, 2017.“Ever wonder howBitcoin(andothercryptocurrencies)

e9ffc424b79f4f6ab42d11c81156d3a17228d6b1edf4139be78e948a9332d7d8 YouTube .

https://www.youtube.com/watch?v=bBC-nXj3Ng4 . andNielsen,M.6December, 2013.“HowtheBitcoinprotocol 28

27 https://data.bitcoinity.org/ Blockchain detail

FIGURE 2 HASH FUNCTION HASH

HASH OF PREVIOUS BLOCK 6 Alice pays ohn 8 Bitcoins Mark pays Sara 5 Bitcoins Mike pays Alfred

THE NONCE HASH FUNCTION HASH

17 | THE MOWAT CENTRE 18 | INSIDE THE BLACK BLOCKS competition willstillbedeterminedby random to buyingadditionaltickets –thewinnerof and checkmore numbersmore quickly–similar of winningbecauseitwillallowthemtoguess computational powerwillimprove odds aminer’s competition islike andwhileadding alottery are todosoaswell. Inotherwords, trying the – especiallybecausealltheothercompetitors of winning,doingsodoesnotguaranteevictory finding thenoncewillimprove chances aminer’s While dedicatingadditionalcomputingpowerto » » » threeserves key functions: becauseit This mathematicalpuzzleisimportant For example,theBitcoinsoftware doesnot transactions thatmake uptheproposed block. there are anyinconsistencieswithintheproposed nodecheckingtoseeif that operatestheminer’s and consistsofthecopy oftheBitcoinsoftware process ofvalidation isfairlystraightforward had gathered toputintothisnewblock.The validated allthepending transactions thatit for thenonce,minerwillhave automatically prior tosealingtheblock,even tosearching the rest ofthenetwork.Itshouldbenotedthat the nextstepistobroadcast this newblockto Once aminerfindsthenonceandsealsblock, chance. » » » which minergetstosealeachblock. round ofthecompetition,thereby randomizing impossible topredict whowillwinanygiven guessing randomnumbers,itisbasically Because thenoncecanonlybefoundby without winningthecompetition. the factbutessentiallyimpossibletouncover It yieldsananswerthatiseasytoconfirmafter network. significant computingpowertomaintainingthe by requiring nodestodedicate participating It makes inthecompetitioncostly participation puzzle iscorrect andthattheadditionsto competition winnerfoundtothemathematical independently verify thatthesolution block. Before doingso,however, eachminerwill their copiesoftheblockchain by addingthisnew the networkandeachofotherminersupdate miner broadcasts thisnewblocktotherest of Once they have sealed theblock,winning not own. user attemptingtotransfer anassetthatthey do the pre-existing stateofthedatabase–e.g.,a proposed transactionsthatare inconsistentwith form ofdouble-spending).Norwoulditvalidate than oneotherusersimultaneously(anobvious allow ausertotransfer thesameassettomore occurrence. easily caught,attemptslike thisare notaregular the process wouldbere-run. Becauseitisso would bepromptly rejected by thenetworkand new blockwiththeresult thatthisnewblock the othernodeswhenthey received theproposed such attemptwouldimmediatelybenoticedby broadcast ittotherest ofthenetwork.Butany the blockchain whenthey sealtheblockand improper transactionsthatbenefitedtheminto tointroducewinner ofthecompetitioncouldtry becausetechnicallythe This stepisimportant compatible withtheircopiesoftheblockchain. the blockchain proposed inthenewblockare and atdifferent rates.Thisuneven spreading can blocks across thenetworkwillproceed unevenly transmission speed.Thus,thespreading ofnew of thetransmissioninfrastructure willimpact information ontheInternet,andquality because geographicallocation,routing ofthe quickly,place very itisnotinstantaneous While communicationbetweennodestakes block tothenetworkessentiallysimultaneously. occurs, more thanonenodewillbroadcast anew block atbasicallythesametime.Whenthis puzzle andwinthecompetitiontosealnext network toindependentlysolve themathematical it ispossibleformore thanonenodeonthe decentralized worldwidenetworkofcomputers, Because blockchains are maintainedby a blockchains, namelysomethingcalled“forking.” case, weneedtoexplainoneadditionalfeature of blockchain. Inorder tounderstandwhythisisthe additional five blockshave beenaddedtothe a transactiontohave beencompleteduntilan minutes, mostusersofBitcoindonotconsider that, whileanewblockiscreated every ten One oftheinteresting thingsaboutBitcoinis What thefork? blockchain (seeFigure 4). are temporarily twocompetingversions ofthe that they acceptedfirst.Theresult isthatthere on extendingthebranch containing thenewblock track ofbothbranches thechainbutonlywork following rule:allnodessimultaneously keep branches asjustdescribed–by usingthe when theblockchain hasbeensplit intomultiple the blockchain –thenamegiven tosituations The Bitcoinsoftware managesthis“forking”of different blockandaddedittotheirblockchains. from adifferent nodefirst,willhave accepteda nodes, having received analternatenewblock network may acceptonenewblockwhileother result inasituationwhere multiplenodesonthe Forked blockchain Normal blockchain growth blocks.” that have beenabandonedare called“orphan (see Figure chains 5).Theblocksintheshorter transfer theirattention tothenowofficialbranch branchand working onextendingtheshorter a longerbranch,they willautomaticallystop shorter, branchare informedthatthere isnow Once nodesthatwere workingontheother, now now longerbranchbecomestheofficialbranch. successfully addsanotherblocktothechain,this Thus, assoononeofthecompetingbranches should onlyworkonextendingtheofficialbranch. is considered theofficialbranchandminers resolve it:thelongestbranchofblockchain software containsanotherruledesignedto branches doesnotlastlongbecausetheBitcoin Normally, however, thiscompetitionbetween FIGURE 4 FIGURE 3 BRANCH A BRANCH A BRANCH B BRANCH A BRANCH B BRANCH A New block New block BRANCH B BRANCH B Miners Miners Miners Miners Miners Miners move to Branch B Branch AMiners move to Branch B Branch AMiners

19 | THE MOWAT CENTRE Miners Miners 20 | INSIDE THE BLACK BLOCKS Forked blockchain beingresolved purchase outoftheiraccount,thereby allowing they transferred the bitcoins usedtomake the blockchain tothestatethatexistedbefore evidence thatitoccurred andreturn the official transaction, they are seekingtodestroy the In otherwords, by erasingtherecord oftheir record ofthistransactionfrom theblockchain. through thattransaction–seektoremove the taken possessionofthepizzathey purchased secured thebenefitofthisfirsttransaction–say then, atsomepointlaterintimeafterthey have completes atransactionwithanotheruserand refers toascenarioinwhichfraudster in anewform.Inthiscontext,double-spending enable thedouble-spendproblem tore-emerge While notunusualorproblematic, forkingdoes fraudster wouldbe altered. would remain thesame– onlythetransactionofinterest to the 29 Note,inthisscenarioalltheother transactionsintheblock no longerexists. proposing anewblockin whichthattransaction was recorded, andthenforktheblockchain by to theoneinwhichtransactionquestion on theblockchain, usuallytheblockjustprior of thetransactionandthenreturn toapoint by waitinguntilthey have secured thebenefit The way todothisis thatafraudsterwouldtry to passingabadcheque. future. Theresult would,insomeways, besimilar them tospendthesesamebitcoinsagaininthe FIGURE 5 BRANCH A 29 Inotherwords, thefraudster BRANCH B BRANCH A New block BRANCH B Miners Miners Miners move to Branch B Branch AMiners Miners Attempt toforkablockchain retroactively transaction. they spentwhilestillenjoying thebenefitsof they canrecovertransaction history thefunds get therest ofthenetworktoacceptthisnew their counterparty. Theideabeingthatifthey can in whichthey never transferred thesebitcoinsto forthebitcoinsinquestion transaction history propose anewblockthatcontained would gobackintimeontheblockchain and currency atthegrocery store. a bitlike tospendyour ownhomemade trying transactions withthem.Essentially, itwouldbe paying anyattentiontothemorengagingin private branchoftheblockchain withnooneelse fraudster wouldsimplybeoperatingtheirown the be acceptedastheofficialbranch.Otherwise and fraudulentbranchoftheblockchain should to convincetherest ofthenetworkthattheirnew successful isifthefraudsterwere somehowable The onlyway thatsuchamanoeuvre wouldbe FIGURE 6 BRANCH A The Fraudster BRANCH B Miners being abletodosoforanextendedperiodof block ortwofasterthantherest ofthenetwork, could reasonably expecttogetluckyandseala displace itastheofficialbranch. fast enoughtoovertake theoriginalbranchand the fraudsterwillbeabletosealenoughblocks still competing,itistremendously unlikely that the rest ofthenetworkagainstwhich they are will bethesameforfraudulentactorand Given thatthedifficultyoffindingnonce longer officialchain. network willstillbefocusedonextendingthe they overtake theofficialbranchrest ofthe new chainthemselves. Thisisbecause,until will have tosealeachsubsequentblockinthis created thefirstblockinnewbranch,they Bitcoin blockchain atanytime,oncethey have is PoW. Whileitispossibleforanyone toforkthe defence thatisbuiltintotheBitcoinblockchain a scenarioessentiallyimpossible.Themain blockchain isspecificallydesignedtomake such length. Whiletheoretically possible,theBitcoin one thatincludestheoriginaltransaction–in such thatitovertakes thelegitimatechain– extend theirnewfraudulentbranchofthechain To besuccessful,thefraudsterwouldneedto publications/btcProcFC.pdf Vulnerable and GünSirer, E.Nodate. blockchains-feared-51-attack-now-becoming-regular/ Now BecomingRegular.” A.8June,2018.“Blockchain’sHertig, Once-Feared 51%Attack Is to bevulnerableinthisway. For amore in-depthdiscussion,see power. At themoment,Bitcoinblockchain doesnotappear an attackwithlessthan51percentofthenetwork’scomputing there are somewhoargue thatonecouldprobably mountsuch hypothetical problem isreferred to asa“51percentattack,” though could, essentially, guaranteetheirabilityto winthelottery. This of thecomputingpowerdedicatedto thenetworkthatthey if asingleentitycameto control asufficientlylarge percentage 30 Theintegrityofthissystemwouldbethreatened, however, added tothechainbefore assumingthattheir usually waituntilfive additionalblockshave been impossible. Thatiswhyusersofthenetwork time becomessounlikely astobeessentially . CornellUniversity. Coindesk Majority isnotEnough:BitcoinMining is . https://www.cs.cornell.edu/~ie53/ . https://www.coindesk.com/ 30 Whilethey . andEyal, I Blockchain withforksandorphanblocks has beenpermanentlyaddedtotheblockchain. blockchain thatthey cannowrest assured thatit be overtaken by afraudulentbranchofthe it issoimprobable thatthetransactioncould is thatoncemanyblockshave beenadded, transaction hasbeencompleted:theassumption the non-corruptedversions of theblockchain. alter sufficientcopiesof the ledgertooverwhelm hack enoughnodesforthe hacker tobeable it wouldbesimplytoodifficult tosimultaneously node hasitsowncopy oftheledgermeansthat chain (seeBox 1).Additionally, thefactthateach with subsequentblocksandcreate aforkinthe so wouldbreak themodifiedblock’sconnection essentially impossibletoaltertherecord asdoing chain containsahashofthepreceding one,itis this isbecause,given thateachblockinthe the ledgerby hackingit.Inthefirstinstance makes itisessentiallyimpossibletocorrupt validate thenewblockoftransactions.This wins thecompetitionisabletoindependently copy oftheblockchain toensure thatwhoever on thefactthateachnodehasaccesstoitsown of thenetwork.Theconsensusmechanismrelies is therole played by thedistributedP2Pcharacter A finalkey pointtonoteaboutblockchain design Why mine? FIGURE 7 BLOCK ORPHAN BRANCH OFFICIAL BLOCK ORPHAN BLOCK ORPHAN

21 | THE MOWAT CENTRE 22 | INSIDE THE BLACK BLOCKS included inthenextblock,they canalsooffer of theirproposed updateandrequest thatitbe bitcoins. Bitcoin blockchain, thisreward isasetnumberof a reward, usuallyintheformofatoken. Inthe by providing thewinnerofcompetitionwith include asystemthatincentivizes participation answer istwofold.First,blockchains usually expensive, whydoesanyone compete?The inthiscompetitionis But, ifparticipating is amoney losingproposition. anything otherthanspeciallydesignedhardware so highthatattemptingtominebitcoinsusing electricity toenterthiscompetition,are now block, andthecostsinvolved inpurchasing the of computingpowercompetingtosealthenext only astandard laptopcomputer, theamount possible tosuccessfullyminebitcoinsusing to maintainingthenetwork.Whileitwasinitially of computingpowerthatnodeshave dedicated next blockisautomaticallytiedtotheamount difficulty ofwinningthecompetitiontoseal redundancy andisthusquiteinefficient.The is thattheentire systemrelies heavily on scheme forpreventing corruptionoftheledger ingenious The majordrawbacktothisotherwise block actuallyends upbeing. around 2140,dependingonwhattheaverage timerequired per the 21millionth,andfinal,newbitcoin likely appearing sometime $130,000 CAD).Eventually, thereward willdecrease to nothing with reward atthetime of thiswriting,over sitsat12.5bitcoins(worth, reward decreases by halfabout every fouryears. Currently, the bitcoins. Interestingly, theBitcoinsoftware issetsuchthatthe 32 Initially, thereward forsuccessfullysealingablockwas50 articles/2017-12-07/bitcoin-is-greener-than-its-critics-think the Oceans.” blockchains. Ou,E.7December, 2017.“No,BitcoinWon’t Boil of alternative consensusmechanismsby Bitcoinandother 31 Eventually thisenergy intensitymay force theadoption now oftenmore proposed updatesthanspace But asthevolume ofupdateshasgrown there are minimal or non-existent onthe Bitcoin blockchain. first few years ofitsoperation,thesefees were a fee forprocessing theirupdate.Duringthe 32 Bloomberg Second,whenusersnotifythenetwork . https://www.bloomberg.com/view/ 31 . the decentralized system. miners are provided withanincentive tomaintain bitcoins andreceiving transactionfees, Bitcoin in atimelymanner. Thus,betweenminingnew to includetheirproposed transactioninablock proposed transactionsinorder toinduceminers will nowoftenoffer modestfees alongsidetheir for theseupdatesinmanyblocks.Thus,users thing together... and the stapler and the stapler and this digital and this digital At some point At some point physical thing physical thing someone to someone to can always can always corrupt the corrupt the staple this staple this you need you need system. system.

23 | THE MOWAT CENTRE THE FIRST DIGITALLY 3 NATIVE VALUE SYSTEM With this understanding of how blockchain functions in place, we can shift our focus to the potential implications of this new technology. As was mentioned earlier, applications for blockchain technology are being proposed, developed and launched across an increasingly diverse array of sectors ranging from personal digital identity management, to electricity grids,33 to digital pet breeding games.34

In subsequent sections we highlight a few of these applications. Before diving too deeply into specific applications, however, it is important to first get to grips with the fundamental innovations introduced by blockchain which underpin these new applications. Thus, in this section, we focus on the two key dimensions along which blockchain’s impact will likely flow, namely automation and decentralization. Digital commerce

Before examining these two key dimensions, however, it is useful to quickly review the context into which blockchain is emerging and illuminate the significant changes to this context it may trigger.

Enthusiasts often suggest that blockchain is important because it creates an “Internet of Value” in the same way that the worldwide web created an “Internet of Information.”35 Similarly, others suggest that blockchain is the “distributed trust network that the Internet has always needed but never had.”36 Care should be taken with these catchy turns-of-phrase, however, as it is often unclear what they actually mean or what the implications of an “Internet of Value” might be. After all, we can already transfer value across the Internet fairly easily – as shown in Figure 8, digital commerce is already booming.

33 Briggs, L. 2 December, 2016. “NEWS: Energy May be Ripe for the Sharing Economy, Thanks to Bitcoin’s Blockchain Technology.” Advanced Energy Perspectives. http://blog.aee.net/news-energy-may-be-ripe-for-the-sharing-economy-thanks-to-bitcoins-blockchain-technology. 34 See https://www.cryptokitties.co/. 35 Hasse, F. von Perfall, A. Hillebrand, T. Smole, E. Lay, L. Charlet, M. 2016. Blockchain – an opportunity for energy producers and consumers? PwC. https://www.pwc.com/gx/en/industries/energy-utilities-resources/publications/opportunity-for-energy-producers.html. Page 40. 36 Marc Andreessen, quoted in Tapscott, D. and Tapscott, A. 2016. Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business and the World. London: Portfolio Penguin. Page 5. This is a confusing quotation as the great innovation of blockchain is not

24 | INSIDE THE BLACK THE INSIDE | 24 BLOCKS that it creates a network of trust, but rather, that it eliminates the need for trust. Growth ofdigitalcommerce

(see Box 2)like dollars,euros, yen –whichare onlyrepresented value isthatunlike existingforms–suchas“fiat”currencies transferred digitallyandblockchain-enabled formsofdigital The key difference betweenexistingformsofvalue that stands toenableblockchain’s mostrevolutionary consequences. value system.” More thananythingelse,itisthisinnovation that first time,thecreation ofwhatwecallthefirst“digitallynative What isspecialaboutblockchain ishowithasenabled,forthe statistics/379046/worldwide-retail-e-commerce-sales/ 2014 to 2021(inbillionU.S.dollars).” ecommerce-statistics Growth Trends [Infographic] Source: Orendorf, A.1September, 2017. 9-34. Bundle ofBlockchains? Law.” DigitallyDisruptingProperty involved inunderstanding it usingtraditionallegalconcepts,seeSzilagyi,K.2018.“A 37 For anin-depthdiscussionofthe legalcharacterofBitcoinandthedifficulties of laws. outside ofthiscontextand independentofanynationalsystem function ofthedigitalsystemthey are embeddedin,impossible and are controlled anddefinedby software. Theirexistenceisa Alternatively, blockchain-enabled assetsare which isultimatelycontrolled anddefinedby thatothersystem. forms ofvalue isonlythe digital realm. Thismeansthatanydigital representation of these their value from asystemoflawsthatexistsindependent the and controlled through legislation.Thesecurrencies derive intrinsically digital digitally, blockchain allowsthecreation offormsvalue thatare

FIGURE 8 2 (USD) Trillions 1 0 .3 1 4 37 2 1 0 .5 1 5 andStatisa.2018.“Retaile-commerce salesworldwidefrom . Mostexistingsystemsofvalue are created 2 1 0 .9 . ShopifyPlus. 1 6 2 2.3 representation 0 E-Commerce 1 7 Global Ecommerce: StatisticsandInternational https://www.shopify.com/enterprise/global- 2 2.8 0 1 8 . Statisa. ofanoriginalversion . 2 PROJECTED SALES 3.3 0 Cumberland LawReview 1 https://www.statista.com/ originally 9 2 3.9 0 20 digital can be 2 4.5 0 2 . 48(1) 1 an individual’sabilityto usually substantiatedby this value. Thisvalue is declared themtohave or centralbank,has such asagovernment because someentity, which have value only we currentlyuseand as Canadiandollars,that refers tothemoney, such The term“fiatcurrency” which itismade). precious metal,outof the commodity, oftena of theusefulness intrinsic value by dint (where themoney has or commoditymoney held by agovernment) a commodity, usually represents aclaimon currency (wheremoney to representative value, asopposed independent intrinsic Fiat money hasno by thisgovernment. in currencybacked them tosaidgovernment pay thetaxes owedby Fiat Currency BOX 2

25 | THE MOWAT CENTRE 26 | INSIDE THE BLACK BLOCKS necessary. Consequently, thosecurrently holding longer truebecausethestaplerisno value isinherently digital,however, thisisno always corruptthesystem.” digital thingtogether... [and][t]hestaplercan someone tostaplethisphysicalthingand key informantsputit,“atsomepointyou need are currently because, asoneofour necessary considerable powerfrom theirroles assuch, institutions,whichderive These intermediary of value andtheirphysicallegalanchors. existing digitalrepresentations ofexistingforms currently managetheconnectionbetween tremendous disruptiontotheinstitutionsthat native value systemsrepresent apotentially This isnewandprofoundly Digitally important. after-creditor-talks-break-down financialpost.com/news/economy/greece-in-shock-as-banks-shut- to avoid financialcollapse.” “Greece inlimboasitshutsbanks,putslimits on cashwithdrawals this powerbecomeobvious. TheAssociatedPress. 29June,2015. ofwithdrawalsaday,them to amaximumofonly€60worth does banks effectively froze Greeks’ bankaccountsin2015andlimited rarely, forinstancewhentheGreek government andthecountry’s existing financialsystem,butthispowerisoftenhidden.Only Banks andgovernments exercise tremendous powerover the 38 Corruptionisperhapsastrong word, butthepointisclear. previously possible. new areas ofeconomicactivitythatwere not novel characteristicsofthesesystemswillenable of digitallynative value systemsliesinhowthe is likely toemerge from blockchain’s creation entails. Indeed,themostsignificantresult that that theadvent ofdigitallynative value systems repercussions oftheeven more fundamentalshift disruption isjustoneofmanypossible traditional financialinstitutions,thispotential potential thatblockchains possess While muchhasbeenmadeofthedisruptive power. the staplerstandtoloseagreat dealoftheir The NationalPost . 38 Whenaformof . http://business. vis-à-vis

Zcash (improved privacy) orLitecoin(fastertransactionconfirmations)alsoexist. cryptocurrency, butothercryptocurrencies thatfocusonproviding specificfunctionalitiessuchas institutions thatactlike digital foreign currency exchanges. Bitcoinisthemostwell-known exchanged forfiatcurrency. Thismoney-changing usuallyoccursatcryptocurrency “exchanges,” exists onlyonthenetwork.Unitsofdifferent cryptocurrencies canbeexchanged foreachotheror money andtosecure thesystemagainstcorruption.Cryptocurrency hasnophysicalformand of value techniquestogeneratenewunitsof andunitofaccountwhichusescryptographic A blockchain-based systemofdigital cashmoney asaP2Pmediumofexchange, that serves store CRYPTOCURRENCY months andyears tocome. still emerging andevolving, andanyattemptatsuchcategorizationwillneedtobeamendedinthe means definitive orexhaustive. Thedivisionsbetweenthesecategoriesare asmanyare blurry category. tonote,however, Itisimportant thatthislistisoffered asahelpfulguide andisby no we defineeachofthesecategoriesbelowandprovide tokens examplesofparticular foreach typology thatdividesthisnewclassofassetsintoseven categories. In anattempttoorganize thisexpandinguniverse, DonandAlexTapscott have developed aninitial used asaway ofreferring tothisuniverse ofdistinctdigitaltokens. these assetsthatdoesnotexist.Increasingly, assets”or“digitalare theterms“crypto being isactuallymisleadingasitimpliesalevelassets theterm“cryptocurrency” ofhomogeneityamong such asBitcoin,are bestunderstoodassomethingakintoatraditionalcurrency, formanyofthese According to watch?time_continue=1602&v=YM4EwxQ3eFY 41 Tapscott, A.28March, 2018.“CryptoSummit 2018|AlexTapscott: GlobalStateofCrypto.” 40 Garner, B.14February, 2018.“WhatisStorj? Guide.” |Beginner’s 39 See component ofaninternal pricingsystemusedtoallocatethecomputing powerofthenetwork. use ofsometheEthereum network’sdecentralized computingpower –oftencalled“gas”isa P2P network)onitsnetwork.Therole oftheethertoken, whichrepresents anentitlementtothe DApps (decentralized applications,i.e.,software programs like Bitcointhatrunonadecentralized contracts”(business logicandagreementsto run“smart encodedinsoftware -seeBox 4)–and applicationsotherthandigitalpayments,to support wasdesignedtoprovide userswiththeability blockchain thatemerged outofitscreators’ frustrationwiththeBitcoinblockchain’s limitedability token thatisnative totheEthereum platform,isthemostwell-known ofthesetokens. , a based software additional functions beyond platformscapableofsupporting payments. Ether, the systems, platformtokens are asvalue designedtoserve systemsforgeneralpurposeblockchain- systems. Unlike cryptocurrencies, whichare specificallydesignedtoenablesecure digitalpayment Similarly tocryptocurrencies, platformtokens are unitsofvalue withindigitallynative value TOKENSPLATFORM Digital Assets BOX 3 https://ca.investing.com/crypto/currencies

Investing.com there are nowmore than1,900“cryptocurrencies.” . Thisestimatewasmadeon26July, 2018. CoinCentral.

https://coincentral.com/storj-beginners-guide/ YouTube 40 41 Drawingontheirwork, . https://www.youtube.com/ 39 Whilemanyofthese, .

27 | THE MOWAT CENTRE 28 | INSIDE THE BLACK BLOCKS and settlingoftransactions,bettertrackingownership,otherfeatures enabledby thefactthat There are manypotentialadvantages toissuingsecuritiesonablockchain, suchasfasterclearing » » » » Howey Test intoCanadianlaw. Essentially, according tothistest,atoken isasecurityifitinvolves: Coast CoinExchange v. aslightlywiderversion OntarioSecuritiesCommission)thatimported ofthe often referred tointheUSAas“Howey Test” or, case(Pacific inCanada,by thenameof court “investment contract”andthusmeetthelegalcriteriausedtodefineasecurity. Thesecriteriaare digitally onablockchain platform.Inotherwords, securitytokens are tokens thatconstitutean Security tokens are bestunderstoodassecurities–suchstocksorother equities–issued TOKENSSECURITY using Storj’snative utilitytoken.ᵝ (called farmers).Tenants whosedataisbeingstored pay thefarmerswhoare storingtheirdata Storj DApp. Storjprocesses thisdataanddepositsitwithuserswhohave spare storagecapacity example. Storjuserswhowanttostore data(calledtenants)uploadtothecloudthrough the DApp. Storj,adecentralized cloudstorageDApp thatruns ontheEthereum network,isonesuch would needtospendorholdthatDApp’s native utilitytoken intheactivitiesofthat toparticipate Ethereum networkfor thecomputationalworkthey toruntheDApp, perform usersoftheDApp DApps. Thus,while aDApp mightrequire aplatformtoken suchasethertopay nodesonthe systems, utilitytokens asunitsofvalue serve withinthedigitalvalue systemscreated by specific toplatformtokens,systems. Contrary whichare native togeneralpurposedecentralized computing Like cryptocurrencies andplatformtokens, utilitytokens are alsounitswithindigitallynative value TOKENSUTILITY of aregulator-approved prospectus, thathave beensetby securitiesregulators. Consequently, many ofthesetoken are likely illegalofferings. 43 Currently, however, manyexisting securitiestokens have likely beenissuedwithoutmeetingmanyof therequirements, suchastheissuing SecuritiesLaw_csa_20170824_cryptocurrency-offerings.htm 42 CanadianSecuritiesAdministrators. 24August, 2017.“Cryptocurrency Offerings.” systems. governments are already examiningthepossibilityofusingblockchains toimplementcarbonpricing physical assetslike toldusthatsome atmosphericcarbon emissions.Indeed,someinterviewees these tokens mightbemost usefulincreating oradvancing whathecalls“frontier markets” in gold oroil,insteadofanintangibleassetlike ashare inacompany. AlexTapscott suggeststhat asset, naturalassettokens represent ownershipofaphysicalasset,suchasspecific amount of While similartosecuritytokens inthatthey represent anentitlementtotheownershipof TOKENSNATURAL ASSET software. these tokens, unlike papershare are certificates, programmable, meaningthey canbecontrolled by » » » » with theexpectationofprofit in acommonenterprise an invest to comesignifican 43 ment ofmoney ᵝ tly from ofothers theefforts . 42 CSA StaffNotice46-307 . http://www.osc.gov.on.ca/en/ specific physicalassetlike goldoroileven toanexistingfiatcurrency. to achieve muchthesameresult by creating asystemwhereby thevalue ofatoken ispeggedtoa speeds andtheabilitytoeasilytransfer money across borders. ,suchasTether, seek government backing,withmanyoftheadvantages ofacryptocurrency, suchasfastertransaction manyoftheadvantageswould marry ofafiatcurrency, suchasthestabilitythatcanderive from blockchain asameansofovercoming thisproblem. Theideawouldbethatsuchacurrency of exchange, somehave suggestedthatgovernments couldissueadigitalfiatcurrency ona Given howthecurrent volatility ofcryptocurrencies hasunderminedtheirusefulnessasamedium CRYPTO-FIAT CURRENCIESORSTABLECOINS billion USD. for ourpurposescountascollectibles–isamajorproblem inagrowing market already 15 worth computer gamingcircles, –which thesaleoffraudulentdigitalitemssuchasin-gameweaponry each other. from whichuserswillbeabletocollectandtradewith significantmomentsinbaseballhistory announced thatitwillsoonlaunchablockchain-based avatars gameinvolving crypto-collectible or digitaltradingcards. Indeed,impressed MajorLeagueBaseball by thesuccessofCryptoKitties, Other collectibleshave toemerge, started suchastheabilityto buy ashare ofamusician’s song in ablockchain-based gameinwhichplayers are abletocollectandbreed uniquedigital“cats.” replicable digitalcollectibles.Themostwell-knownoftheseare whichexistastokens CryptoKitties for digitalcurrency, itscreation of“digitalscarcity” isnowenablingtheproduction ofuniquenon- In muchthesameway thatthecreation ofblockchain technologysolved thedouble-spendproblem DIGITAL COLLECTIBLES 44 Krewen, N.10December, 2017.“Want to buy apieceofDrake song?Track’s rightssold viapioneeringdigitalcurrency scheme.” brookings.edu/blog/techtank/2018/03/09/venezuelas--undermines-other-cryptocurrencies-and-international-sanctions/ “Venezuela’s “petro” undermines othercryptocurrencies –andinternationalsanctions.” articles/2018-04-03/crypto-rating-sites-are-already-calling-venezuela-s-petro-a-scam andKarsten,J.West, D. 9 March, 2018. sanctions. Laya, P. “Crypto RatingSitesAre Already CallingVenezuela’s Petro aScam.” appears to represent somecombinationofthesetwoideas, butitmay alsobeascam designed to circumvent international financial 47 Venezuela’s petro, adigitalcurrency thatitbegan issuinginFebruary 2018andwhichitclaimsisbacked by Venezuela’s oilreserves, qz.com/1145833/cryptokitties-is-causing-ethereum-network-congestion/ 2017. “Theethereum networkis gettingjammedupbecausepeopleare rushingto catson itsblockchain.” buycartoon exists forotherdigitalitems,suchascollectiblesinonlinegamesrun by asinglecompanylike World ofWarcraft. Wong, J.4December, other digitalonesisthatthey existonadecentralized networkandare thuslessvulnerableto thesinglepointoffailure problem that 46 Casey, MandVigna,P. 2018.TheTruth innovation Machine.Page from 96.Animportant thatsetsblockchain-based collectiblesapart com/2018/7/13/17568766/mlb-cryptocurrency-baseball-game-summer 45 Kelly, M.13July, 2018.“MLBwillrelease acrypto baseballgameontheblockchain.” pioneering-digital-currency-scheme.html Toronto Star . https://www.thestar.com/entertainment/music/2017/12/10/want-to-buy-a-piece-of-a-drake-song-tracks-rights-sold-via- 45 46 Themarket fordigital collectiblesmay belarger thanonewouldinitiallyimagine:in . . . Bloomberg. The TechTank . TheBrookings Institute. .

https://www.theverge. https://www.bloomberg.com/news/ 47 Quartz. https://www. .

https:// The . 44

29 | THE MOWAT CENTRE 30 | INSIDE THE BLACK BLOCKS to awiderpercentage ofthepopulationthan previously restricted commercial opportunities These neweconomicentitiesalsoopenedup and businessesthatwere notpreviously viable. in innovative ways andtocreate businessmodels enabled a new class of enterprises to raise capital launched. Thecreation ofthesetechnologies joint stockcompanies,didsowhenthey were new developments, suchastheinvention of economic activityistoconsiderhowother how blockchain canenablenovel formsof Another analogythatmay bebetterat illustrating commerce. became aubiquitousbackbonetechnologyof it tookhundreds ofyears before thepractice enabled thedevelopment ofmoderncapitalism, bookkeepingall, whiledouble-entry may have expect toomuchfrom blockchain toosoon.After blockchain butalsotocautionreaders notto of to highlightthefoundationalimportance bookkeeping. Often,thiscomparisonisdesigned of blockchain totheinvention ofdouble-entry Some commentatorscompare theinvention activity New formsofeconomic of-possible-economic-relationships-bca4511fa88b Relationships 49 Stark,J.26July, 2018. blockchain-technology-threaten if/21724906-trust-business-little-noticed-huge-startups-deploying- The Economist 48 TheEconomist. 15July, 2017.“Disrupting thetrustbusiness.” representation ofthisconceptinFigures 9-12. relationships.” he callsthe“spaceofpossibleeconomic illustrates thisideaby usingaconceptthat Josh Stark,alawyer andblockchain entrepreneur, creation andeconomicgrowth. ever before andhelpedtospursignificantwealth . Medium. . 48 https://www.economist.com/news/world- 49 We have adaptedhisgraphical https://medium.com/@jjmstark/the-space- The SpaceofPossible Economic . . relationships, circa2007 Space ofpossibleeconomic economic relationships betweenindividuals The spaceillustratedinFigure 9represents all in examplesthanFigure 9. Romans. Noticehowitissmaller and more limited actual relationships available totheancient possible economicrelationships aswellthe example, Figure 10represents the spaceof of technologicaldevelopment changes.For economic relations alsochangesasthelevel over time,thesize ofthisspacepossible the space.Becauseofhowtechnologychanges relationships available of within thatportion illustrative examplesofthemanypotential blockchain technology. Thefive iconsrepresent technology thatexistedpriortotheinvention of that were actuallyavailable atthelevel of – represents alltheeconomic relationships light green andencompassingthefive icons space inthebottomright-handcorner–coloured that couldtheoretically ofthe exist.Theportion FIGURE 9 Cryptocurrencies offerings Initial coin balance Credit card balance Credit card ownership Stock ownership Stock ownership Stock Mortgage Mortgage Mortgage bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing parents Loan from parents Loan from parents Loan from parents Loan from 1850 relationships inVictorianEngland,circa Space ofpossibleeconomic relationships inancientRome,circa200 Space ofpossibleeconomic 1800s. space hadevolved andexpandedby themid- available. InFigure 11,weillustratehowthe innovations arrived making more ofthisspace Over time,technologydeveloped andnew emerge. cryptocurrencies andinitialcoin offerings (ICOs) that isavailable asnewinventions suchas of thespacepossibleeconomicrelationships blockchain increasing isfurther theproportion As isshowninFigure 12,theadvent of FIGURE 11 FIGURE 10 Cryptocurrencies Cryptocurrencies offerings Initial coin offerings Initial coin balance Credit card balance Credit card balance Credit card balance Credit card ownership Stock ownership Stock ownership Stock ownership Stock ownership Stock ownership Stock Mortgage Mortgage Mortgage Mortgage Mortgage Mortgage bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing parents Loan from parents Loan from parents Loan from parents Loan from parents Loan from parents Loan from parents Loan from parents Loan from relationships, circa2018 Space ofpossibleeconomic as wellitspotentialimpacts,bothgoodand expansion describedinthesefigures isoccurring ICOs provide of goodexamplesofhowthesort already wealthyaccredited investors. previously reserved forwell-connectedand technologies attheground level, anopportunity toinvest inexcitingwith theopportunity new provide retail investors anywhere intheworld more democraticandfairbecauseofhowthey venture capitalists.They alsoargue thatICOsare through existingsources like angelinvestors and easier way forinvestors toraisefundsthan bad. ICOproponents argue thatthey offer an FIGURE 12 Cryptocurrencies offerings Initial coin balance Credit card balance Credit card ownership Stock ownership Stock ownership Stock Mortgage Mortgage Mortgage bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing bank deposit Interest-bearing parents Loan from parents Loan from parents Loan from parents Loan from

31 | THE MOWAT CENTRE 32 | INSIDE THE BLACK BLOCKS time. ICOsarecontroversial stock tothepublicforfirst through theregulatedsaleof by aprivate corporation raising ofinvestment capital Offering, whichreferstothe the termIPO, orInitial Public term ICOismodelledafter such asbitcoinorether. The most popularcryptocurrencies usually madeusingoneofthe the tokens soldinanICOis with them.Thepurchaseof on thatblockchain, associated offered right touseaservice such asvoting rightsorthe these coinshave characteristics, for theirventures. Sometimes and entrepreneurstoraisefunds used by blockchain start-ups digital coinsortokens generally An ICOisanunregulatedsaleof and accommodatingofICOs. Switzerland aremoreaccepting Singapore, HongKong and Other jurisdictions,suchas constitute illegalsecurities. of thetokens soldinICOsmay warned consumersthatmany other countries,regulatorshave countries suchasChina.In nature andarebannedinsome because oftheirunregulated Offerings (ICOs) Initial Coin BOX 4

joint stockcompaniesasafinancialtoolbecause do so. Many ICOsare likely illegalgiven theirfailure to regulatory requirements astraditionalsecurities. must complywiththesamedisclosure andother meaning that,inorder tobelegalofferings, they in factconstitutesecuritiesalegalsense, given thetermsofsomeICOs,these tokens may few willbeoutrightscamsorfrauds. projects may never deliver anyreal results, anda as ICOshave ManyICO theirshortcomings. not necessarilyapositive development, however, traditional early-stageventure capital. raised more fundsthrough ICOsthanfrom as itisestimatedthatin2017,entrepreneurs ICOs have proven bothpopularandlucrative library.hbs.edu/hc/ssb/history.html Collection atBaker Library. History.”Sea BubbleShort 54 President and Fellows ofHarvard College. Nodate.“South theguardian.com/uk/2007/sep/11/britishidentity.past empire.”Scotland lostits17thcentury 53 Carroll, R.11September, story ofhow 2007.“Thesorry Narrow-Path-for-Cryptocurrency-Offerings www.dwpv.com/en/Insights#/article/Publications/2017/CSA-Staff- Offerings.” Blockchain Boom:CSAStaffNarrow thePath forCryptocurrency 52 Rawle,G.andRizvi,Z.7September, 2017. “Coolingthe com/cftc-joins-sec-warning-crypto-pump-dumps/ Against Crypto Pump-and-Dumps.” 51 Higgins,S.15February, 2018.“CFTC JoinsSECInWarning out-promise-something-important-meaning economist.com/news/leaders/21731161-there-ico-bubble-it-holds- madness ofinitialcoinofferings.” 50 TheEconomist. 9November, 2017.“Themeaninginthe compromised. is itselfnecessarilyflawedorirredeemably being bungleddoesnotmeanthattheinstrument be misusedorcanfundaproject thatendsup the SouthSeasbubble, Scheme of earlyfailures like thecatastrophic Darien 52 But just as it was not worth abandoning Butjustasitwasnotworth Bulletin 53 orfraudslike onesthathelpedproduce . Davies Ward Phillips &Vineberg LLP. Harvard BusinessSchool. South SeaBubbleResources intheKress 54 thefactthatanICOcan The Economist Coindesk . The Guardian . . . https://www.coindesk. . https://www. 51 . 50 Moreover, . https://www. https://www. Thisis . https:// optimal corporatedecision-making. focusthatarguably– ashort-term encouragessub- exhibited by manyofthosewhoowntraditionalsecurities profitreduce ofshort-term seekingthatare thesorts Some have argued thesecharacteristicscould helpto community, albeitinanon-geographicaldigitalcontext. economicnetworkinawaya particular thathelpsbuild – suchasIthacaHOURSinthatthey fixvalue within By thislogic,ICOswouldbesimilarto“localcurrencies” associated with. in theactivitiesandcommunitiesthatthesetokens are they provideservices, abuilt-inincentive to participate these utilitytokens essentiallyrepresent IOUsforfuture orplatforminthefuture.service that confers theholderwithrighttouseacompany’s are betterunderstoodassimilartoalicenseorcoupon to acryptocurrency, proponents argue thatmanytokens exist forholdersoftraditionalsecurities.Indeed,contrary holders –asopposedtotheincentive structures that tokens tocreate newincentive structures fortoken relationships liesintheabilityofplatformandutility how thisinnovation cancreate newtypesofeconomic their features willbecomesignificant.Oneexampleof thus itisnotyet possibletoknowexactlywhichof ICOs are stillavery newmeansofraisingcapitaland tokenomics-a-business-guide-to-token-usage-utility-and-value-b19242053416 Usage, UtilityandValue. 58 Mougayar, W. 10June,2017.Tokenomics cryptocurrencies/ https://www.coindesk.com/lawmaker-wants-new-york-state-to-pilot-local- “Lawmaker Wants NewYork Stateto PilotLocalCryptocurrencies.” rise-in-the-u-s-and-why-it-matters/2/#8279c837259a com/sites/katiegilbert/2014/09/22/why-local-currencies-could-be-on-the- On TheRiseInU.S.--AndWhyItMatters.” pdf https://ijccr.files.wordpress.com/2012/05/ijccr-vol-8-2004-4-jacob-et-al-2. Survey.” and CulturalCapitalofCommunityCurrency, AnIthacaHOURSCaseStudy 57 Jacob,J.Brinkerhoff, M.Jovic, E.Wheatley, G.23May, 2004.“TheSocial com/2018/01/16/magazine/beyond-the-bitcoin-bubble.html the BitcoinBubble.” s-only-the-start-310aba7f3790 medium.com/e-residency-blog/were-planning-to-launch-estcoin-and-that- that’s onlythestart.” RepublicofEstonia E-Residency Blog. 56 Korjus, K.19 December, 2017.“We’re planningto launchestcoin lunch/ Delaware’s Lunch.” 55 Adlerstein,D. andTinianow, A.21April,2018.“WhyICOsCouldEat . See also Gilbert, K.22September,. SeealsoGilbert, 2014.“WhyLocalCurrencies Could Be . International JournalofCommunityCurrency Research . Coindesk The NewYork TimesMagazine 56 Medium . https://www.coindesk.com/icos-eat-delawares- ; Johnson,S.16January, 2018.“Beyond . https://medium.com/@wmougayar/ 55 Becauseofhow — Forbes A BusinessGuideto Token 58 . https://www.nytimes. andDe,N.5June,2018. . https://www.forbes. Medium . . 8.pp.42-56. Coindesk . — https:// and 57 .

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33 | THE MOWAT CENTRE 34 | INSIDE THE BLACK BLOCKS software) andconnectedto that canbecontrolledby (that is,physicalproperty property assets orsmart as programmabledigital in theagreement,such implicated the property the meansofcontrolling contract tobeprovided with is neededforthesmart self-enforcing. to beself-executing and contracts have theability in computercode,smart Because they arewritten and/or performance. verificationobservation, orthewholeofits a part agreement andautomates the termsofacontractual of softwarethatencodes contractisapiece smart concept by NickSzabo,a asa First articulated contracts.asp investopedia.com/terms/s/smart- Contracts.” 60 Investopedia. Nodate.“Smart net/smart_contracts_2.htm LOTwinterschool2006/szabo.best.vwh. InformationInSpeech/CDROM/Literature/ www.fon.hum.uva.nl/rob/Courses/ Building Blocks for DigitalMarkets 59 Szabo,N.1996. contract. required by thetermsof – oftencalled“oracles” the sourcesofinformation Smart BOX 5 Investopedia .

Smart Contracts: Contracts: Smart 60 Allthat . https://www. l . 59 .

http:// the most important implicationsofblockchainthe mostimportant willflow As withmanyothertechnologicaladvances, someof Automation have impactsthat spread beyondthe economicsphere. new capabilitiesthatblockchains enablewilllikely and decentralization.Inbothcases,thechanges dimensions ofchange,namelyincreased automation possibilities willlikely have theirimpactalongtwo economic relationships. Mostofthesenew blockchains canexpandthespaceofpossible ICOs are onlyoneofanumberways that blockchain revolution The dimensionsofthe one party failstomeet theirobligations. one party agreement thatcanbeusedtoenforce compliance if andtoprovideobligations betweenparties proof ofan Signing aformalwrittencontractismeanttoclarify agreed to,andthescheduleforpayments tobemade. products beingpurchased, thepricesthathave been or example, contractswilloftendescribetheservices parameters ofanagreement between them.For or firmsoftencreate acontracttospecifythe what atraditionalcontractdoes.Currently, individuals steppingbackandconsidering contracts, itisworth Before gettingtoofarintoadiscussion ofsmart contracts.”system willenabletheuseof“smart derives from howitscreation ofadigitallynative value most significantway thatblockchain willlikely dothis from theways inwhichitenablesautomation.The words, by writing thetermsofacontractinto to directly exercise control over value. automated by increasing theabilityofacontract by expandingtheboundariesofwhatcanbe contractstoaccomplishthis enables smart value. predictability, thereby creating additional reducing thisinefficiencyandriskby increasing contractsoffer Smart thepossibilityoffurther economic friction,riskandinefficiency. reduce onlytoreduce, risk,serves noteliminate, coordinate and activitiesbetweencounterparties an imperfect exercise that, whileithelpsto to obtain.Ultimately, contractingisalways often multiplyandsatisfactioncanbedifficult theseproblemsthe ruleoflawispoorlyobserved, or negotiations. involves lengthyandtime-consuminglitigation the termsofagreement, butdoingsooften andthestateforenforcementapply tocourts of to existence ofacontractentitlestheparties conditions canbebreached. Itistruethatthe agreed criteria,payments canbelateandother products are delivered thatdonotmeetthe itself ensure and compliance.Oftenservices Significantly, thesigningofacontractdoesnot Blockchain Technology 64 Wright, A.anddeFilippi, P. 12March, 2015. szabo.best.vwh.net/smart_contracts_2.html InformationInSpeech/CDROM/Literature/LOTwinterschool2006/ in theworld. 63 NickSzaborefers to thisasan“embedding”ofthecontract szabo.best.vwh.net/smart_contracts_2.html InformationInSpeech/CDROM/Literature/LOTwinterschool2006/ Digital Markets 62 Szabo,N.1996. Page 25-26. Blockchain Technology andTheRiseofLex Cryptographia 61 Wright, A.anddeFilippi,P. 12March, 2015. they implement. efficiency oftheexecution oftheagreements compliance, whilealsoincreasing thespeedand contractingcanreducesmart therisksof non- software thatcandirectly theseterms, perform 62 Thecreation ofadigitalvalue system http://www.fon.hum.uva.nl/rob/Courses/ . http://www.fon.hum.uva.nl/rob/Courses/ Smart Contracts:BuildingBlocksfor Smart 61 64 . Page 25. Moreover, incountrieswhere Essentially, adigitalcontract . . Decentralized Decentralized 63 Inother . SSRN. car lockingitsdoorsanddisablingengineuntil contract,itcouldsendasignaltothe the smart should hemissonebeyond thelimitspecifiedin contractwillmonitorBob’ssmart payments and, contractoveritself tothesmart theInternet.This wallets (theaccountsthatholdether)andthecar the Ethereum blockchain andlinkstheirdigital this agreement contractthatrunson inasmart months. BobandAcmeMotorCorpcanformalize make payments ofoneetherevery monthfor36 a carfrom AcmeMotorCorpandagrees to Consider thefollowingexample.Bobpurchases in enforcement from thepracticeofcontracting. remove muchoftheneedforhumanintervention written incomputercodehastheabilityto unresponsive manufacturer inorder to have theirrightsenforced. warrantee,therebycar’s saving customers theneedto badgeran contractscouldalsobecreated tocorporations. Smart enforce a contractsneednotbenefitonlylarge 65 Inprinciple,thesesmart the purchaser wasultimatelyunabletopay. hound thepurchaser andrepossess thecarif for intermediarieslike collectionsagenciesto to thisarrangementcouldremove theneed property linked contractsandsmart of smart this transaction.Moreover, thecombination removing banksandcredit card companiesfrom digital wallettothecarcompany–thereby purchaser setsupadirect payment from their intermediaries. For instance,inthiscase,the much more efficientthrough theremoval of contracts, manysystemscouldberendered this scenarioshowsishow, by enablingsmart the development ofautonomousvehicles) what innovations neededforthistooccur(suchas Setting asidethenon-blockchain technological missed asufficientnumberofpayments. return itselftothedealershipifpurchaser include aclausethatcommandedthecarto vehicles arrive, contractcouldeven thesmart payments resume. Indeed,onceautonomous 65

35 | THE MOWAT CENTRE 36 | INSIDE THE BLACK BLOCKS centralized commandandcontrol systemswill be essentialtothedeployment ofthe IoTbecause example, IBMhassuggestedthatblockchains will by thecapabilitiesthatblockchains offer. For obstaclescouldbedissolved the mostimportant There are avariety ofreasons forthisbutsome of yet noticeablyimpactedmostpeople’s dailylives. Currently, despitesignificanthype,theIoThasnot mainstreaming oftheIoT. technological advances thatenablesthe blockchains may provide oneofthecritical with eachotherautonomously. Insodoing, systems couldenablerobots tobegin contracting ofautomation,digitallynative valuethis sort more strikingbecauseofhow, by enabling contractingareThe implicationsofsmart even also result inlostjobs. equation, however, contractswould thesesmart circle. Byremoving financialinstitutionsfrom the number ofdefaultsthereby creating avirtuous onerousness offinancingmightinturnlowerthe defaults wouldbereduced. Thisreduction inthe financing becausethecostsassociatedwith financing carpurchases tolowerthecostof By extension,thiscouldalsoenablethefirms of Things Panikkar, S.2015. 66 Pureswaran, V. andBrody, P. withCohn, J.Finn,P. Nair, S. degree.to beautonomous–atleastacertain likely meansthatthedevices inquestionwillneed Control willneedtobedecentralized andthat to beconnectedremotely tothesesystems. of billions,perhapstrillions,devices willneed insecure, tomaintaineffectively whenhundreds be toocomplex,andby extensionexpensive and . IBMInstitute forBusinessValue. Slides3-5and 7. Device democracy: Saving thefuture oftheInternet 66 establishment ofdedicatedblockchains native formsofvalue, onecanimaginethe contractscapableofcontrollingsmart digitally of howblockchains enablethecreation of the allocationofscarce resources. Because exchanges thereof, asameansofcoordinating world. Currently, weuseeconomicvalue, and autonomous devices –andhumansinthereal as they seektointeractwithotheranonymous will likely confront manyautonomousdevices environment. Thisisexactlythesituationthat – betweenanonymousentitiesinatrustless transactions –and,by extension,collaboration blockchains were created tosolve wastoenable regard. Recallthatoneofthekey problems that Blockchains offer criticalfunctionalityinthis one considers thefees that intermediarieslike to feature relatively highcosts –especiallywhen of transferring value electronically andthey tend of intermediaries.Currently, there are limitedways something that is often a function ofthe presence The mostobvious oftheseobstaclesiscost, proliferation ofsuchsystems. themass of existingtechnologiessupporting obstaclesstandin thewaynumber ofimportant stock market, doalready exist.Nonetheless, a contracting, suchasalgorithmictradingonthe it could:thingsthatlookabitlike smart programmed onexistingtechnology?Perhaps to function.Couldnotsuchacontractbe as Bob’s carpayments, require ablockchain One mightaskwhysomeoftheexamples,such Why notjustuseacredit card? that wouldlikely generatesignificantnewvalue. role ofhyper-efficientcoordination mechanisms doing, theseautomatedmarkets couldplay the and efficientlyallocatescarce resources. Inso autonomous devices wouldbeabletointeract in ahostofdifferent contextswithinwhich self-containeddigitalmarketssupporting might enablerevolutionary newforms ofdigital Similarly, manyhave suggestedthatblockchains multiple timesasecondwouldbenecessary. payments valued atthelevel ofmicro-cents efficiently, asecure systemcapableofprocessing them inreal time. and thelarger grid,tradingpowerbetween generating systemsnegotiatewitheachother but autonomoushomesolarpanelelectricity electricity gridsinwhichindependently-owned help toenabletheimplementationofsmart some have suggestedthatblockchains could lowcostwouldbenecessary.very For instance, to beviable,hightransactionthroughputs at frequently. Inorder forsuchimplementations on micropayments, oftenbeingmadeextremely that have beentheorized woulddependheavily more innovative implementationsofblockchain onebecausesomeofthe an especiallyimportant The questionoffees charged by intermediariesis using acredit card. than thesamefees thatwouldhave beenincurred out aBitcointransactionwere 5.5timeslower in 2016suggestedthatthefees incurred carrying customer andthemerchant. Oneestimatemade banks andcredit card networkscharge boththe 1498093738-the-promise-of-blockchain-in-distributed-energy.html Ontario distributed energy.” News. 68 Kishewitsch,S.June2017.“The promise ofblockchain in fee.html https://bitinfocharts.com/comparison/bitcoin-median_transaction_ the standard fees charged by themajorcredit card networks.See network wasabout0.8percent– stillsignificantlylowerthan suggesting thatthemedianratebeingpaidto transactonthe $31.71 (USD)andthemedianvalue transactedwas$3,814(USD) 2017, themedianfee paidto have atransactionprocessed was remained comparatively low. For example,on22December, 2018,feesDecember 2017andJanuary onthebitcoin blockchain credit-card-fees/ investopedia.com/news/how-much-cheaper-are-bitcoin-fees- Bitcoin Fees thanCredit Card Fees?” 67 Hayes, A.13September, 2016.“HowMuchCheaper are to contentthatwouldinvolve usersmaking music basedontheconceptof‘metered’ access rights managementfordigitalassetssuchas . https://magazine.appro.org/news/ontario-news/5166- . . Even attheheightofcryptocurrency frenzy in 68 For thesegridstofunction 67 Association ofPower Producers of Investopedia . https://www. . could enablelocalorimplementation-specific however, isthe idea thatblockchain technology into development andtesting. between multipleblockchains –are already well use ofstatechannelsorensuringinteroperability credit card networks, currently have lowerthroughput capacitythan blockchainsit istruethatthemostimportant ofimplementationspossible.While these sorts handle thevolume ofpayments required tomake card- It isdifficulttoimaginehowexistingcredit like record labels,iTunes orSpotify. access theircontentinsteadoftointermediaries micropayments directly every timethey toartists distributed energy.” 72 Kishewitsch,S.June2017.“The promise ofblockchain in media/making-sense-of-cryptoeconomics-c6455776669 of Cryptoeconomics.” L4Media. explanation, pleaseseeStark,J.28 August, 2017.“MakingSense ensures thatcheaters willnotberewarded. For amore in-depth the transactiononto theblockchain atanytimeinaway that involved towhich enablesanyoftheparties unilaterallymove of“emergency break”the transactionsisguaranteedby asort reducing theburden they imposeonthenetwork.Integrity of the transactionsto beconductedontheblockchain, thereby withouttheneedfor be carriedoutdirectly betweenparties 71 Statechannelsare amechanismwhereby transactionscan fact-sheet.pdf VCOM/download/corporate/media/visanet-technology/visa-net- 65,000 transactionspersecond.See Visa claimedin2016thatitsVisaNetsystemcouldprocess upto somewhere between3.3and7transactionspersecond,while Ethereum. For example,Bitcoincancurrently onlyprocess challengeforpublicblockchains likeimportant Bitcoinand 70 Overcoming thehurdle remains posedby “scalability” an artists-profit-more-from-their-creative-works Business Review. Profit MoreCould HelpArtists from TheirCreative Works.” 69 Tapscott, D. andTapscott, A.22March, 2017.“Blockchain systems. for thesystemsutilized by legacypayment basis –inways thatsimplywouldnotbepossible relatively cheaplyandflexiblyon aper-project blockchains tobecreated andoptimized – based payment systemswouldbeableto 72 .

https://hbr.org/2017/03/blockchain-could-help- 70 upgrades–suchasthe Medium https://usa.visa.com/dam/ . 71 https://medium.com/l4- More important, . 69 . Harvard

37 | THE MOWAT CENTRE 38 | INSIDE THE BLACK BLOCKS » » » » » their centralized counterparts: aredimension, decentralized services worsethan blockchain argues industry that“onalmostevery Adam Ludwin, anentrepreneur workinginthe blockchain-based systemslike Bitcoin.Infact, as aproblem fortheexpansionorscalabilityof use blockchain. Thisinefficiencyisoftencited redundancy andinefficiencyinsystemsthat blockchain’s decentralizationisthatitcreates and security, themostobvious implicationof possible andthatitincreases theirresilience fact thatdecentralizationmakes blockchains take more timetoappreciate. Indeed,beyond the offeredthe opportunities by decentralizationcan of blockchain technology. But,unlike automation, decentralization isoneofthekey characteristics is decentralization.Asdiscussedearlier, blockchain enablesinnovation and change The secondmaindimensionalongwhich Decentralization de89d417cb80 Chain. 73 Ludwin, A.16October, 2017.“ALetterto JamieDimon.” » » » » » They are more expensive They are slower They have volatile governance.” anduncertain They have worseuserexperiences They are lessscalable Medium . . https://blog.chain.com/a-letter-to-jamie-dimon- 73 everyone oratall times.To understandhowitcan Censorship resistance for isnotimportant on theplatform. contractrunning ofasmart halt theperformance Ethereum, itmeansthatnoentitycanunilaterally being completedonthenetwork.Incaseof tostopatransactionfromunilaterally intervene of Bitcoin,thismeansthatnothird can party alteration orcontrol by athird party. In the case to asystem’s tounilateral imperviousness Censorship resistance isatermthatrefers community as“censorshipresistance.” creates whatisreferred tointheblockchain in blockchains becauseofhowdecentralization Nonetheless, Ludwin stillseessignificantvalue wikileaks/#522954382cad andygreenberg/2010/12/07/visa-mastercard-move-to-choke- Choke WikiLeaks.” Greenberg, A.7December, 2010.“Visa,MasterCard Move To Wired 75 Poulson, K.12April,2010.“PayPal Freezes WikiLeaksAccount.” complicated reality. Seethediscussion of“TheDAO” inSection6. 74 Thisstatementistruebutobscures aslightlymore was created tofrustrate. of authoritariangovernment actionthatBitcoin adopters wouldlikely seethisasexactly thekind releasing government secrets, manyearlyBitcoin the grounds thatWikileakswasirresponsibly applaud thesefirmsfortakingactionson and diplomaticdocuments. thousands ofclassifiedandsecret USmilitary from theUSgovernment afterWikileaksreleased networks, amove likely taken underpressure refused toallowpayments toWikileaksover their major credit card companies,aswellPaypal, engaged incensorshipofitsusers.In2010,all case where acentralized intermediatedsystem examiningarecent itisworth become important, . https://www.wired.com/2010/12/paypal-wikileaks/ Forbes 74 . https://www.forbes.com/sites/ . 75 Whilemanymight ; 77 Kharpal,A.9August, 2017.“Initialcoinofferings have raised madness ofinitialcoinofferings.” 76 TheEconomist. 9November, 2017.“Themeaningin the “cypherpunk” communitywhere resentment of Blockchain wasfirst proposed inthe between cryptocurrencies andfiatcurrencies. resistance canbeillustratedwithacomparison A more fundamentalformofcensorship resistant. the extenttowhichblockchains are censorship regulators candotostopthem,demonstrates Ethereum are enabling ICOs, and that there is little is positive ornot,thefactthatblockchains like them. and traditionalinvestors woulddeclinetofund such asstockmarkets, woulddeclinetolistthem blockchains becausethealternative platforms, projects wouldnothave beenavailable butfor venture capital. Internet firmsthandidtraditionalearly-stage In fact,in2017,ICOsprovided more fundingfor attracted over $3.2billion(USD)ininvestment. ICOs have explodedinpopularityand,2017, enthusiasm forICOs.Aswasdiscussedearlier, censorship resistance canbefoundinthecurrent of Another exampleoftheimportance where enforcement ofCanadian lawsmay beimpossible. concerning are fraudulentICOslaunchedfrom foreign jurisdictions by aCanadianauthoritywhilehewasphysicallyinCanada.More that Lacroix wascaughtandstopped wasbecausehecharged dominic-lacroix ca/nouvelle/1071971/peine-prison-createur-monnaie-virtuelle- condamnéàlaprison.”virtuelle and Bergeron, Y. 8December, 2017.“Lecréateur d’unemonnaie qvzkx7/plexcoin-scam-founder-sentenced-to-jail-and-fined-10k Motherboard. “PlexCoin ScamFounder Sentencedto JailandFined$10K.” PlexCoin never hitthemarket. Pearson, J.8December, 2017. traditional IPO, theregulator would have beenable to ensure that and sentencedto jailtime.HadLacroix attemptedto conducta than $15milliondollarsfrom investors before hewasarrested ICO, Lacroix wasstillableto launchhisICOandcollectmore Dominic Lacroix, itscreator, to notgoaheadwithhisplanned have taken action,isinstructive inthisregard. Despite ordering 79 ThecaseofPlexcoin, oneofthefew ICOswhere regulators 78 Ludwin, A.16October, 2017.“ALetterto JamieDimon.” early-stage-venture-capital-funding.html https://www.cnbc.com/2017/08/09/initial-coin-offerings-surpass- $1.2 billionandnowsurpassearlystageVC funding.” 78 Settingasidethequestionofwhetherthis 79 Vice. Itisalsointeresting to notethat the onlyreason https://motherboard.vice.com/en_us/article/ 77 Thefundingformanyofthese ICI*Quebec . . http://ici.radio-canada. CNBC .

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out by hyperinflation,have hadthemforcibly with thosewhohave seentheirlife savings wiped But cypherpunks’concernsresonate powerfully and independentcentralbank. have benefitedfrom acompetent,professional likefor manyinacountry Canadawhere citizens a currency iscensorshipresistant isnotapriority places thatneededitleastbecauseensuring said thatBitcoinfirstbecamepopularinthe often donethroughout history. ways thatgovernments andcentralbankshave no entitycouldmanipulateanddebaseinthe Bitcoin’s creation wastocreate acurrency that Many believe thatthekey motivation behind central bankcontrol offiatcurrency wasstrong. dead-capital-economist-idUSKCN10C1C1 desoto/property-rights-for-worlds-poor-could-unlock-trillions-in- Reuters for world’spoorcouldunlocktrillions in‘deadcapital’:economist.” Page rights 216-217.andArsenault,C.1August, 2016.“Property them. SeeVigna,P. andCasey, M.2016. the two-thirds oftheworld’spopulationthatcurrently live without would beto provide reliable accessto secure rightsfor property 2016. to improving thelotofworld’spoor. Vigna,P. andCasey, M. application ofblockchain thatcould make amaterialcontribution limited profitability, isoftentouted asapotentiallytransformative unattractive to traditionalproviders becauseof itslowmargins and billion unbanked individuals,somethingthathasproven difficultor Similarly, Thecreation fortheworld’s5 ofbasicbankingservices magazine/how-bitcoin-is-disrupting-argentinas-economy.html New York TimesMagazine 82 Popper, N.29April,2015.“CanBitcoinConquerArgentina?” creator satoshi-understanding-bitcoin-through-the-lens-of-its-enigmatic- https://motherboard.vice.com/en_us/article/vvbm43/quotes-from- Through theLensofItsEnigmaticCreator.” Liu, A.16January, 2014. “WhatSatoshi Said:UnderstandingBitcoin Spiralus/satoshis-incomplete-economic-vision-eb833a33bcb5 Incomplete Economic Vision. 81 Seeforinstance,Spiralus.23March, 2017.Satoshi’s ne74nw/inside-the-world-of-the-bitcoin-carnivores Motherboard J. 29September2017.“InsidetheWorld ofthe‘BitcoinCarnivores’.” 80 Indeed,these ideascan sometimes get a little strange:Pearson, imposed by thegovernment inplacessuch to theirsavings restricted by capitalcontrols intoanewcurrency,converted orhadaccess The AgeofCryptocurrency . . https://www.reuters.com/article/us-global-landrights- . Vice. https://motherboard.vice.com/en_us/article/ . https://www.nytimes.com/2015/05/03/ Medium . Page 186.Anotherexample . https://medium.com/@ The AgeofCryptocurrency 82 81 . Infact,itisoften Motherboard Blog . . Vice.

and The 80 .

39 | THE MOWAT CENTRE 40 | INSIDE THE BLACK BLOCKS reward software firmswillpay tohackers who blockchains –thatis,the toa“bugbounty” by comparingthevalue hostedonthebiggest in theblockchain industry, illustratesthispoint security. ChrisDixon, aventure capitalistactive “honeypots,” theuseofablockchain canincrease of failure. Similarly, by avoiding thecreation of because ofhowthey eliminatesinglepoints how blockchains enablegreater reliability reliable andsecure. We have already discussed Decentralization alsohelpsmake blockchains looking toprintitsway outofitsdebts. interested –like party aprofligate government to unilateralchange(i.e.censorship)by aself- controlled by theBitcoin software andresistant because thenumberofbitcoinsistransparently impossible inaneconomythatusedonlyBitcoin to pay itsdebts.Inflationofthistypewouldbe government’s reckless decisiontoprintmoney is thedirect andpredictable result ofthe Conversely, like inflationinacountry Zimbabwe as itmatures andgrows more widespread. immaturity asanassetandwilllikely decrease volatility, thisvolatility isarguably theresult ofits Greece. as Zimbabwe, content/23392588-d398-11e7-8c9a-d9c0a5c8d5c9 as itheadsfor$10,000.” 87 Murphy, H.27November, 2017.“Bitcoinstirsvolatility fears collapse.” shuts banks,putslimitsoncashwithdrawals to avoid financial 86 TheAssociatedPress. 29June,2015.“Greece inlimboasit cbc.ca/news/world/venezuela-bitcoin-1.4447568 notspeculation,inVenezuela.”as survival, 85 TheAssociatedPress. 13December, 2017.“Bitcoinboomseen 84 Popper, N.29April,2015.“CanBitcoinConquerArgentina?” crisis-currency/ co.uk/technology/2017/11/20/bitcoin-has-become-zimbabwes- Zimbabwe’s crisiscurrency. 83 Titcomb,J.20November, 2017.Howbitcoinhasbecome But, “Bitcoinisnowanine-year-old multibillion- billions ofdollars. be immense – potentially worth the bigblockchains, reward themonetary would He notesthat if someonewere able tohack any of inform themofvulnerabilitiesintheirsoftware. 86 WhileBitcoinisknownforitsownprice . 83 Argentina, The FinancialTimes The Telegraph 84 Venezuela . News. http://www.telegraph. . https://www.ft.com/ CBC. . . 85 and http://www. 87

with several othertechnologies,blockchain could users’ healthanddemocracy. companies withnegative results forcompetition, Internet intothehandsofasmallgroup ofmega- enabled thecentralizationofcontrol over the for personalidentificationontheInternethas According tothisargument, thelackofaprotocol in thecurrent evolutionary pathoftheInternet. by blockchain isanessentialcorrective toaflaw argument holdthatthedecentralizationenabled abstract andfundamental.Thosewhomake this of decentralizationisactuallymuchmore Finally, someare arguing thattheimportance like pretty goodproof [thatitissecure].” dollar bugbounty, andnoone’s hacked it.Itfeels control-of-our-personal-data https://hbr.org/2017/10/smart-ledgers-can-help-us-reclaim- Reclaim Control ofOurPersonal Data.” 90 Mainelli,M.5October, 2017.“Blockchain CouldHelp Us consumers-and-competition-how-tame leaders/21735021-dominance-google-facebook-and-amazon-bad- titans.” 89 TheEconomist. 18January, 2018.“Howto tamethetech 88 Johnson,S.16January, 2018.“Beyond theBitcoinBubble.” they create. them to ownandbetter protect the data and value origins andre-empower individualsby enabling help toreturn theInternettoitsdecentralized enable societytodisintermediatethesefirms, The Economist 90 . https://www.economist.com/news/ . Harvard BusinessReview . 89 Incombination 88 . themselves is whether themselves is whether necessary or whether or whether necessary One critical question One critical question must constantly ask must constantly ask or even a traditional or even a traditional that governments that governments a simpler DLT – a blockchain is a blockchain is database – database – will suffice.

41 | THE MOWAT CENTRE 42 | INSIDE THE BLACK BLOCKS 4 database –willsuffice.Inmanycases,DLT and or whetherasimplerDLT –oreven atraditional themselves iswhetherablockchain isnecessary question thatgovernments mustconstantlyask even mostproblems forthat matter. One critical Blockchain isnota solutiontoallproblems –or improvementsworthwhile onexistingsystems. be donetoensure thatanynewsolutionsoffer the earlystagesandsignificantworkremains to Nevertheless, alloftheseapplicationsare stillin governments thepossibilityofimproved transparency, efficiencyandeffectiveness. to improving theefficiencyofgovernment businesspermitissuingandlicensingregimes –alloffer medical records, tocreating areliable andaccessiblepublicrecord ofindividuals’academiccredentials These usecases–whichrangefrom enablinggreater effectiveness, patientcontrol andprivacy of Some ofthemostinteresting potentialusecasesforblockchain liewithinthebroader publicsector. governments are already active. hold significantpromise orinwhich some can. Thissectionhighlightsthree areas that uses ofblockchain technologywhenthey toexperimentwithpotential seize opportunities their operations.Consequently, they should functionalities thatcouldhelpthemimprove blockchain offers governments numerous Nevertheless, even withthishealthyscepticism, purpose more efficientlyandeffectively. traditional databaseswillserve thegovernment’s PUBLIC SECTOR BY THEBROADER POTENTIAL USES blockchain-to-transform-electronic-health-records Harvard BusinessReview Potential forBlockchain to Transform Electronic HealthRecords.” 92 Halamka,J.Lippman,A.Ekblaw, A.3March, 2017.“The coming leaders/21736138-welcome-doctor-you-revolution-health-care- is coming.” 91 TheEconomist. 1February, 2018.“Arevolution inhealthcare deliver manyofthesought-after improvements. designs andpooraudittrailsthey have failedto poor interoperability, incompatibleworkflow reasons includingrigorous privacy requirements, theseobjectives,to further butforavariety of health outcomes. also becausedoingsoseemstoimprove patients’ that isattractive from aprivacy perspective but own healthandmedicaltreatments, something means ofgivingpatientsgreater control over their efficiency, EHRsare nowalsobeingseenasa pursued outofadesire tosimplyimprove records (EHRs)have emerged. Whileinitially using blockchain toimprove electronic health In thepastfew years anumberofproposals for Electronic healthrecords .

The Economist 91 . https://hbr.org/2017/03/the-potential-for- ExistingEHRsystemsaim . https://www.economist.com/news/ . 92 to query millionsofEHRsforspecificpieces to query using transparent, opensource contracts smart machine learningalgorithmswithameansof massive newmedicalbreakthroughs by providing interoperability. Itcouldalsoconceivably enable compatibility intoasystemriddledwithpoor tobuild a singlesimplifiedfocusforefforts sourced, EHRblockchain platformwouldprovide The creation ofacommon,public,likely open- additions madetoit. would betracked by theblockchain aswouldany the blockchain, andanyaccesstotherecords records wouldbecontrolled by thepatientvia createda portal by ablockchain. Accesstothe recordsencrypted wouldonlybepossiblethrough they currently reside, butaccesstotheserobustly the institution,beitaclinicorhospital,where suggested. Rather, therecords wouldremain at on theblockchain asissometimesconfusingly EHRs themselves wouldprobably notbeput see them,andtrackingtheiruse.Critically, the where they are stored, controlling whogetsto means oflinkingalltheirrecords, regardless of mechanism thatwouldprovide patientswitha to useablockchain tocreate anoverarching The solutionoffered by blockchain wouldbe Human Services. Health InformationTechnology ofHealthand U.S. Department White Paper prepared forOffice oftheNationalCoordinator for Hardjono,T. A. Diakun-Thibault,N.Forni, L.Landa, F. Mayo, J.van Riezen, R. 93 See,forexample,theproposal containedinShrier, A.Chang, lives andbillionsofdollars. for medicaltrials,potentiallysaving thousandsof mine fornewdiscoveries andidentify candidates enormous newdatasetsforthesealgorithmsto of theserecords. Insodoing,thiscouldunlock information withoutcompromising theprivacy Blockchain andHealth IT: Algorithms, Privacy, andData 93 . physical copy ofthecredential. them todosoby providing anoriginalorvalidated to prove thatthey holdacredential stillrequire to hold.Manyinstitutionsthatrequire individuals other individualsholdthecredentials they claim as difficultforindividualstoreliably confirmthat that they claimtohold.Conversely, itcanbejust individuals toprove thatthey holdthecredentials be frustrating,time-consumingandcostlyfor accreditation.post-secondary Currently, itcan use caseforblockchain isinprofessional and Another area thatoffers apotentiallyimportant credentialssecondary Professional andpost- Educated-Students-and-Professionals.html Pilots-Blockchain-Based-Digital-Badges-for-Internationally- release/2018/05/30/1513818/0/en/World-Education-Services- Professionals.” Digital BadgesforInternationally Educated Studentsand 2018. “World Education Pilots Blockchain-Based Services already beingpiloted: World Education 30May, Services. 94 Theuseofblockchain to overcome thisproblem is vulnerable tofraud. of thesephysicaldocuments,makingthem reliably demonstratetheauthenticityofmany scholarships orjobs.Moreover, itisdifficultto they needthemtoapply foradditionalschooling, or degree from certificates universities when to purchase multiplecopiesoftheirtranscripts international students–whomay berequired can alsobefrustratingforstudents–especially recognized ortoestablishnewcredentials. throughextensive testing to have their credentials needtogo skilled immigrantswhootherwise inefficient andcostly, especiallyforrefugees and The process ofproving one’s credentials canbe Globenewswire . https://globenewswire.com/news- . 94 It

43 | THE MOWAT CENTRE 44 | INSIDE THE BLACK BLOCKS harmful impactsofcredential fraud. some ofthesignificant,butoftenunnoticed, credential holders,suchasystemcouldreduce in ensuringpublicsafety andaccountability for credential requirements often playroles important from fraudulentdegree mills. of allPhDsissuedintheUSAeachyear come claimthatasmanyhalf but someexperts difficult. Thismay seemlike asmallbenefit, it wouldalsomake degree fraudmuchmore Not onlywouldsuchasystemincrease efficiency, atanytime. query employer withtheirwalletaddress forthemto individual couldsimplyprovide theinstitutionor wanted tocheckanindividual’scredentials, the wallet. Ifanotherinstitutionorpotentialemployer would beabletoaddthetoken totheirdigital token. Individualswhoreceived thesecredentials granted toanindividualintheformofadigital blockchain onwhichthey issuedthecredential associations –tojointlyoperateapermissioned such asuniversities, collegesorprofessional be forthecredential grantinginstitutions– The solutionoffered by blockchain orDLT would lawyer-defrauds-clients-1.4276157 Go Public lawyer out$100Kafterhiringfraudsterwithfake lawdegree.” 96 Johnson,E.11September, 2017.“‘Iamdevastated’: Toronto marketplace-fake-degrees-1.4279513 CBC. reveals hundreds of Canadians have phoney degrees.” 95 Szeto, E.Vellani, N.“‘Allofuscanbeharmed’:Investigation

http://www.cbc.ca/news/business/diploma-mills- . CBC. http://www.cbc.ca/news/business/fake-toronto- . . 95 Consideringthat 96 Marketplace. businesses. Indeed,individualsandbusinesses regulations currently facedby individualsand interacting withgovernment orcomplyingwith could solve would betoreduce theburden of One ofthemostfundamentalproblems this individual’s dateofbirth. are referred toas“verifiable claims”suchasan granting, licensingandtheprovision ofwhat in improving theefficiencyofgovernment permit Finally, blockchain may prove extremely useful claims” licensing and“verifiable Government permits, https://mowatcentre.ca/regulating-disruption/ Governing in an eraofrapidtechnologicalchange. 97 Johal,S.andUrban,M.11,May, 2017. called TheOrgBook, toverify informationabout theVON’s digitalwallet, canquery services loaded ontothesystemsothatothergovernment permits andother“verifiable claims”tobepre- government’s planforVON isforgovernment use blockchain inthisway. Theprovincial a goodexampleofhowgovernments could Verified Organization represents Network(VON) business. TheGovernment ofBritishColumbia’s some oftheseburdens forindividualsand Blockchain offers areal toreduce opportunity times. physically entered intomultiplesystems failure becauseitisbeingtransmittedand corrupted through humanerror ortechnological likelihood thatthisinformationwillbehacked or Not onlyisthisinefficient,itcreates agreater provided orlevels tootherparts ofgovernment. with thesameinformationthatthey have already providing different orlevels parts ofgovernment a significantamountoftimeby repeatedly often complainthatthey are forced towaste Regulating Disruption: . TheMowatCentre. 97

» » andsystemsofrecord:the followingportals needed toacquire arestaurant permitbetween used tosimulatethemovement ofinformation businesses’ information,butthedatabasewas test databasenever containedreal individuals’or operating oneofthenetwork’snodes.Thisprivate and provincial level witheachoftheseentities andagenciesatthemunicipal of departments database thatwasshared betweenavariety In thisproof ofconcept,they created atest with someoneseekingtoopenarestaurant. used toimprove theway governments interact in whichthey explored howblockchain mightbe of Toronto recently concluded aproof ofconcept Canada, theGovernment ofOntarioandtheCity In anothersimilarexample,theGovernment of credentials toothersthemselves. claims sothatthey willbeabletoprove their to have theirownwalletstoholdverifiable ambition isfororganizations like businesses organizations onthenetwork.Eventually, the network/ https://www.continuumloop.com/bcgov-verifiable-organization- Network –Impressive ClientDemo.” 98 O’Donnell,D. 18April,2018.“BCGov Verifiable Organization » » » » » » » » the Government usedto ofOntarioonlineportal Computronix AssuranceSystem Regulatory the AlcoholandGamingCommissionofOntario Software LicensingSystem the CityofToronto LicensingOffice’s Progress System Registry the CanadaRevenue AgencyBusinessNumber system the Government ofOntarioONBISregistration of anewbusiness provide informationandrequest incorporation . Blog. ContinuumLoopInc. 98 and thevarious levels ofgovernment. For the journey from boththeperspective oftheapplicant to improve theefficiencyofcurrent customer was significantscopefortheuseofblockchain The proof ofconceptdemonstratedthatthere it enabledare illustratedin Figures 13 and14. was used,andthechangesinprocesses that restaurant. Themannerinwhichtheblockchain had acquired thepermitsneededtoopentheir government onetoconfirmthattheapplicant access apublicblockchain linked toaprivate request from apotentialrestaurateur –might external entity–e.g.,abankevaluating aloan an Ethereum testnetworktosimulatehowan Additionally, theproject alsoincludedusing significant risk, wouldnotbenecessary. a singleblockchain atenormous costandwith Bang,” inwhichtheentire systemisreplaced with existing legacysystems. Inotherwords, a“Big as appropriate andinlinewiththe lifecycles of implemented incrementally across thesystem note asitmeansthatblockchain orDLT couldbe pointto of legacysystems.Thisisanimportant that couldhelptoconnectthelarger ecosystem blockchain ordistributed ledgerasjustonepiece that itwouldbepossibletointroduce a Moreover, theproof ofconceptalsodemonstrated involved whilealsoreducing costs. increase theintegrityandsecurityofdata approach togovernment andalso services ambition tocreate amore “clientfocused” ofsystemcouldalsohelprealizethis sort the four intheproof ofconcept.For governments, was cutfrom eightunderthecurrent systemto the numberofstepsacitizen isrequired totake do sofrom weekstodays. Note,forexample,how permitsandcutthetimerequirednecessary to many different government offices toacquire the way couldreduce theburden oftravelling to customer, theuseofblockchain or DLT inthis

45 | THE MOWAT CENTRE 46 | INSIDE THE BLACK BLOCKS Current restaurantpermitacquisitionjourney FIGURE 13 6 4 5 2 3 1 8 7 Sara must now: now: this documentation, she can After Sara has accumulated everything is in order, documentation, if physically verified her Once the AGCO has is in order, documentation, if everything has physically verified her Once the Licensing Office ONBIS System with the pens anaccount sends Sara her: The BIsystem documentation her new Sara must now restaurant. can now set up her ara receives herloan Follow Saraasshe: before, wantstoopenarestaurant. Sara, whohasnever ownedabusiness and: take

it with her as she visits the AGCO’s offices in person. mailing the documentation she has acquired or taking () aming ommissionofntario fromthelcoholand apply foraliquorsaleslicense and liquor saleslicense ara isgranteda so that she can: Provides therequiredinformation CRA business number business name registration of incorporation articles municipal businesslicense zoning review preliminary Office in person to visit the City of Toronto’s Licensing application for a loan. present of her it as a part visit abankinperson receive a CRA business register her business name incorporate her business zoning review provided with a business Sara is granted a license and; apply for a apply for prelimina muni to by either and her cipal number ry ry

1 1 b a System. Registry the CRA BN a request to System sends The ONBIS system. to the ONBIS sends itback number and CRA business issuing anew request by responds tothe System Registry The CRA BN Potential restaurantpermitacquisitionjourney FIGURE 14 4 2 1 3 The SingleWindowInterface: all the required information ensures thatSara has provided will berequired identifies allthe permits that the application scans information. provides the required and Interface Single Window account withthe Sara opens an requires. all thepermits she she hasbeengranted processed and that application has been that her Interface Single Window Sara isnotified by the her restaurant. can now setup her loanand Sara receives loan. to apply for a bank branch Sara visitsa Follow Sara asshe: before, wants to openarestaurant. Sara, whohasnever ownedabusiness 1 1 1 1 3a g 1 e c a her loan application. open the business associated with Sara has the permits required to Data Exchange The Data Exchange.the Sara’s application is sent back to granting aliquorsales license After reviewing her application and to theData Exchange. Sara’s application is sent back preliminary zoning review, business license anda and After reviewing her application back to the DataExchange. System Sara’s sends application number, the and granting Sara abusiness After reviewing her application the Data Exchange sends Sara’s to applicationback name now registered, ONBIS incorporated and the business With the business now Exchange into the Data imported submitted it is and completed has been When the application is i granting Sara amunicipal bank sends an inquiry to aninquiry bank sends the . CRA BN Registry CRA BNRegistry automatically to determine if . , 1 3b 1 1 1 1 other distributed ledge technology contractsBlockchain or and smart Data Exchange d b h f business nameregistered. Sara’s businesscanbe that itshouldbe have scannedSara’s application,they recognize contracts ontheDataExchangeAfter thesmart received alltherequired permits recognize that have scannedthenowcompleteapplication,they contracts ontheDataExchangeAfter thesmart (AGCO) to receive aliquorsaleslicense. to theAlcoholandGamingCommissionofOntario application, they recognize thatitmustnowbesent data exchange have scannedtheincomplete contracts onthe After thesmart preliminary zoning review. receive a it shouldnowbe have scannedSara’s application,they recognize that contracts ontheDataExchangeAfter thesmart System Registry recognize thatitmustnowbe have scannedtheincompleteapplication,they contracts ontheDataExchangeAfter thesmart j possesses alltherequired permits. Exchange sendsthebankconfirmationthatSara After scanningitsrecords forverification, the municipal businesslicenseanda Sara canbenotifiedthatshehas . sent to theONBISsystem sent to theCityof Toronto to incorporated andthe sent to theCRABN . sothat Data

47 | THE MOWAT CENTRE 48 | INSIDE THE BLACK BLOCKS has sufficientin-houseblockchain capacityto opportunity, gettingtoapointwhere government advantage oftheproject anduseitasalearning some government employees were abletotake know-how fortheproof ofconcept.While contracted toprovide muchofthetechnical On thehumanside,anexternalconsultantwas be implemented. before ablockchain orDLT-based solution could technologically neutralmay have tobechanged and legislative requirements thatare not implementation. Additionally, regulatory certain questions wouldneedtoberesolved priorto organizations wouldbeon-boarded –allofthese to operateanode,thequestionofhownew used ontheblockchain, theorganizations allowed additions were made.Thetypeofdatastructures the securityofprocesses by whichthese andagencies departments participating be asgoodtheinformationaddedtoitby the tamper-proof andeasilyaudited,itwouldonly Specifically, whiletheblockchain itselfwouldbe a blockchain solutionwouldlikely lieelsewhere. overcome, thelargest challengesinimplementing while there wouldbesometechnicalissuesto The proof ofconceptalsodemonstratedthat both onthetechnicalandpolicysides. tackle more ambitious projects willtake time, critical institutionalreference customers,even as who oftencomplainofaninabilitytoattract experience canbeespeciallyvaluable forfirms forthem.Thisprocurementwhich iscomfortable experience workingwithgovernments atascale locally inOntarioandelsewhere inCanada–with enterprises –ofwhichthere are manybased provide smallandmedium-sized blockchain can enterprises aswell.Theseopportunities are alsoapplicableforsmallandmedium-sized stakes toohigh.Significantly, thesebenefits government capacitywithoutraisingthe they canbeleveraged tohelpbuildinternal advance multipleobjectives. Asjustmentioned, pilot projects represent excellent to opportunities In thisrespect, proofs ofconceptandsmallscale blockchain solutioningovernment inCanada. the implementationofanactualoperational are significantobstaclesonthepathtowards permit. Butitalsodemonstratedthatthere claim, suchastheirpossessionofarestaurant to beableaccessdataorprove averifiable in areas where there wasaneedforthepublic this technologybeimplementedby government could besignificantbenefitsforthepublicshould proof ofconceptalsodemonstratedthatthere or verify claimswitheachotherregularly. The government thatneedtoexchange information different agenciesandlevels departments, of encouraging andenablingcooperationbetween government operations,especiallyasameansof that there are real use casesforblockchain in Overall, theproof ofconceptdemonstrated ambition. involved forfuture projects ofgreater scopeand they helptosetupthe government organizations 5 100 Popper, N.29April,2015.“CanBitcoin ConquerArgentina?” archive/2017/09/big-in-venezuela/534177/ Mining.” 99 Chun,R.September, 2017.“BiginVenezuela: Bitcoin ofGeorgiacountry beganshiftingitsnational a leadingrole. In2017theEasternEuropean –oftenwith governmentsservices playing extreme circumstances toprovide governance Blockchains are alsobeingused inotherless cryptocurrencies. are turningto,orhave previously turnedto, and, previously, Argentina provide astablecurrency (suchasVenezuela in countrieswhere thegovernment hasfailedto lack stabilityoreffective ruleoflaw. For example, The mostobvious instance are incountriesthat or DLT. Insomeplacesthisisalready occurring. conceivably bebetterdelivered usingblockchain thatgovernmentsMany services provide could Competition in“governance services” have impactsinthecontextofpublicpolicy. important Building onthisanalysis,thefollowingsectionidentifiesfourbroad “IssuestoWatch” whichare likely to decentralization andhowitmightimpactgovernment operationscanhelptoreduce thisuncertainty. Nevertheless, understandinghowblockchain works,howitwillenablemore automationand Blockchain isstillayoung technology anditsimplicationsforpublicpolicyare stillunclear. The Atlantic PUBLIC POLICY IMPLICATIONS FOR . https://www.theatlantic.com/magazine/ 100 ), manycitizens . 99 powered-government/#4a56a414454b dubai-sets-sights-on-becoming-the-worlds-first-blockchain- Forbes Becoming TheWorld’s FirstBlockchain-Powered Government. 103 D’Cunha,S.18December, 2017.Dubai SetsItsSightsOn for-land-registry-management computerweekly.com/news/450421958/Sweden-trials-blockchain- land registry management.” 102 Haaramo,E.5July, 2017.“Swedentrialsblockchain for may-be-big-backers establishment-technology-faces-ironic-turn-fortune-governments- https://www.economist.com/news/business/21722869-anti- Governments may bebigbackers oftheblockchain. expands-project/#1f4ecc134dcd government-to-secure-land-titles-on-the-bitcoin-blockchain- https://www.forbes.com/sites/laurashin/2017/02/07/the-first- Land TitlesOnTheBitcoinBlockchain ExpandsProject.” 101 Shin,L.7February, 2017.“TheFirstGovernment To Secure combination oftransparency andimmutability and contexts,butoverall, theideaisthat of theseprojects have uniquemotivations be transactedonblockchains by 2020. for over 100milliondocumentsperyear –to license renewals –processes whichaccount it wantsallvisaapplications,billpayments and lines. recently completedapilotproject alongsimilar land registry systemontoablockchain. . 102 https://www.forbes.com/sites/suparnadutt/2017/12/18/ Thegovernment ofDubaihassaidthat . ComputerWeekly.com . ; TheEconomist. 1June,2017. . . https://www. 103 The Economist 101 Each Sweden Forbes . .

49 | THE MOWAT CENTRE 50 | INSIDE THE BLACK BLOCKS these sorts oftechnologies.Italsooffersthese sorts some delivered more conveniently andefficientlyusing insights intohowgovernment canbe services experience offers anumberoflessonsand blockchains like Bitcoin. DLT by government willlooklike thandopublic the potentialimplementationsofblockchain and may provide abetterindicationofwhatmany nature ofgovernment operations,Estonia’s X-road depending onpermissionlevels. Infact,given the and provide differentiated accesstoinformation collaborators, enablehighlevels oftransparency to trackchangesshared databasesby multiple techniquesandDLTuses similarcryptographic according toourdefinition. centralized databasesitisnotitselfablockchain Since theX-road onlylinksanumberofseparate records, topaying theirtaxes, tovoting online. to doeverything from viewingtheirmedical X-road informationsystemenablesresidents alongthispath.Its thatisthefurthest country ofEstoniaisarguablyThe Balticcountry the reduce forcorruption. opportunities citizens’ interactionswiththeirgovernments, and efficiency ofgovernment operations,theeaseof offered by blockchains couldhelptoimprove the outlined inSection 5. Government ofOntarioandCityToronto proof ofconcept 106 Note,forinstance,thesimilarity oftheX-road to the disruptive.asia/estonian-digital-identity-blockchain/ Estonian digitalidentity blockchain: solved!” 105 Birch, D. ofthenon-existent 29March, 2017.“Themystery government-c12e5002d818 com/sidewalk-talk/how-estonia-became-a-global-model-for-e- for e-government.” 104 Jaffe, E.20April,2016.“HowEstonia becameaglobalmodel warnings. important Side|Walk|Talk. . 106 SidewalkLabs. Thus,theEstonian 105 Nevertheless, it disruptive.asia https://medium. . . https:// 104

access many of the services thatEstonia’saccess manyoftheservices immigrate toEstonia,enablese-residents to does notconfer anyspecialabilitytoactually residents” ofthecountry. E-residency, which whereby non-Estonianscanbecome“digital launched somethingcalled e-residency, a program be emerging. But othermore complexbenefitsalsoappearto government spending. the equivalent of2percentGDPayear in Estonian government claimstohave saved convenience andefficiencyithasenabled.The been thesignificantincreases inadministrative digitization ofgovernment inEstoniahave The mostnoticeableresults oftheX-road-led million-to-estonia-in-first-three-years ee. brought €14.4millionto Estonia infirstthree years.” 109 Cavegn, D. (ed)2December, 2017.“Deloitte: E-residency are-disappointed-in-estonian-e-residency-2322644f5f59 108 magazine/2017/12/18/estonia-the-digital-republic Republic.” 107 Heller, N.18&25December, 2017.“Estonia, theDigital €194 millionrespectively by 2021. benefits wouldlikely risetoover €31millionand report suggestedthattheserevenues andindirect indirect socio-economic benefits.Thesame in government revenues and€13millionin e-residency program hadgenerated€1.4million its firstthree years ofoperation,Estonia’s a 2017report by Deloitteestimatedthat,in set up4,272companiesinEstonia.Furthermore, countries. At thattime, e-residents hadalready for e-residency hadbeenreceived from 143 As ofDecember2017,almost27,000applications a widerchoiceofe-services.” accesstotheEUmarket,services, andaccessto “remote management,lowercostofbusiness increasingly digitalgovernment offers suchas https://news.err.ee/646254/deloitte-e-residency-brought-14-4- https://medium.com/e-residency-blog/heres-why-tax-evaders- The NewYorker. 107 For example,in2014,Estonia

https://www.newyorker.com/ . 108

109 . News . . eer. Estonia’s X-Road dataexchange At themoment,advantages ofe-residency Background Paper. Source: Vassil, K.June2015.“Estonian e-Government Ecosystem: Foundation, Applications,Outcomes.” World Development Report inside-its-embassy/ how-to-stay-in-eu-a-post-brexit-gift-from-estonia-and-an-evening- London. its Embassy.” to stay in.eu:Apost-Brexit gift from Estonia andanevening inside Robinson, N.andHaggman,A.18 November, 2016.“VISIT |How to operateabusinessintheEUpost-Brexit world.Hardy, A. 110 Thebenefitsare abitmore obvious forBriton’s whowant can make andrunbusinesses itdifficulttostart some developing countries where regulations a Canadianperspective. EU market –may notseemoverwhelming from pre-populated taxformsandaccesstothe smart of days orweeks,thespeedandease offiling the abilitytosetupacompanyinhoursinstead digital signatures forallbusinessinteractions, that are oftentouted–suchastheabilitytouse FIGURE 15 https://rhulgeopolitics.wordpress.com/2016/11/18/visit- Geopolitics &Security http://pubdocs.worldbank.org/en/165711456838073531/WDR16-BP-Estonian-eGov-ecosystem-Vassil.pdf . 110 . Royal Holloway; University of Butforresidents of entrepreneurs-in-the-developing-world-ea834005f85e residency-blog/un-and-e-residency-join-forces-to-empower- of Estonia E-ResidencyBlog. to empowerentrepreneurs inthedeveloping world.” Republic 111 Godoy, D. 25April, 2017.“UNande-Residencyjoinforces online businessusingthee-residency program. individuals indeveloping an countriestostart project called“e-Trade forAll”aimedathelping with theUnitedNations(UN)todevelop a Indeed, thee-residency program haspartnered borders –theprogram attractive. hasbeenvery and especiallywhenthatbusinessworksacross – especiallyformarginalized groups like women Medium . https://medium.com/e- . Page 12. . 111

51 | THE MOWAT CENTRE 52 | INSIDE THE BLACK BLOCKS corner ofthegrowing digitalworld. investment, aswell“residents,” toitsoutsized intheracetoattractbusinessesand start has provided Estoniawithacompetitive head essential. Overall, policyframework thissmart innovations like e-residency –has alsobeen optimal return from thetechnologyandenable policy culture andinfrastructure neededtogetan corresponding policyframework” “smart infrastructure. Rather, theconstructionofa the result ofEstoniahaving builtatechnological Critically, however, innovation like thisisnotjust blockchain-based digitalasset,theEstcoin. program lookslikely tobethelaunchitsown (Indeed, thenextbigstepfore-residency this canenablethemostunexpectedinnovations. one exampleofhowthecreation ofplatforms like “government-as-a-platform.” has created theinfrastructure neededtoenable digitization ofEstonia’s governance services More fundamentally, e-residency showshowthe Republic.” #krattlaw. Heller, N.18&25December, 2017.“Estonia, theDigital intelligencewillraise–they evenartificial have ahashtag forit: in grapplingwiththemanylegalissues thatthedevelopment of 115 Inanotherexample,Estonians are alsotakinga leadingrole residency-blog/welcome-to-the-blockchain-nation-5d9b46c06fd4 Republic ofEstonia E-Residency Blog 114 Korjus, K.7July, 2017.“Welcome to theblockchain nation.” estcoin.” 113 Korjus, K.19December, 2017.“We’re planningto launch oreilly.com/books/1234000000774/ch02.html Government asaplatform.” building real-time transittrackingapps.SeeO’Reilly, T. “Chapter2. of government data,aswith citizen scienceinitiatives orin this ofteninvolves thecreation ofvalue through theleveraging government itselfisunlikely orpoorlysuitedto do.For example, impossible to –andwhich withoutgovernment undertake support groups to engageinbeneficialactivitiesthatitwouldbedifficultor government’s core functionsisto enableprivate individualsand forms ofcollective action.Thus,itrefers to theideathatoneof government’s functionisasaconvenor orenablerofbeneficial the conceptofWeb 2.0.At itscore, itrefers to theideathat 112 Government-as-a-platform isaconceptpatternedafter Open Government . https://medium.com/e- 112 E-residency isjust . http://chimera.labs. . 115 114 –the 113 ) . of abouttwo-thirds ofallFortune 500companies than amillion),tobecomethelegalUSdomicile managed, despiteitssmallpopulation(stillless building uparobust businesscaselaw, Delaware staffed withthebestjudgesavailable andby focusedonbusinesstransactions–was court –alaw ofChancery laws, by ensuringitsCourt twentieth century. Bypassingbusinessfriendly to attractbusinessesincorporatethere inthe and thestrategyusedby theUSstateofDelaware parallelsbetweenthisapproachsee important might appealtoentrepreneurs. a companythrough aprogram like e-residency, combined withtheabilitytoremotely administer likeregulatory frameworkinacountry Estonia, It isnotdifficulttoimaginehowawelcoming com/business/archive/2016/10/corporate-governance/502487/ Affect Workers Everywhere.” 117 Semuels,A.October 3,2016.“TheTiny StateWhoseLaws AlexBenay/status/963166899314962432 can chooseabetterdigitalgovernment”. See through e-residency,good services, citizens willhave optionsand 116 “Competition[betweengovernments] isgood.Ifyou don’t offer state monopolyforatleastacentury. Howmight – currency issuance–thathasbasicallybeena shown thatthey are capableofdisruptingan area Bitcoin, asmallnetworkofindividualshave that were simplynotpossiblepreviously. With in theprovision of governance inways services ability tocompetewithCanadiangovernments governments inotherjurisdictionsnowhave the other words, individuals, networks,firmsand the competitionthatgovernments face.In to whichgeographyandborders canblunt state innewways and reducing theextent individuals, firmsandnetworks of activities.Insodoing,itisempowering and automationofavast newcategory system, blockchain isenablingthedigitization blockchain? Bycreating adigitallynative value inthecontext of Why isthisimportant (see Figure 15). 117 The Atlantic . https://www.theatlantic. . 116 vis-à-vis Indeed,onecan https://twitter.com/ the . considering responses tocontingencies ofthis quick solutions–governments needtobegin challenges like theseare notamenableto While unlikely term, tooccurintheshort essentially noeffect? a currency over policyhas whichtheirmonetary under theirjurisdictioncametobeconductedin oftheeconomicactivityoccurring portions governments respond if,forexample,significant business/archive/2016/10/corporate-governance/502487/ Source: Semuels,A.October 3,2016.“TheTinyStateWhoseLawsAffect Workers Everywhere.” Corporate domicilesofFortune 500companiesintheUSA New_York_14_May_2018.pdf?la=en media/Files/PDFs/Bullard/remarks/2018/Bullard_Consensus_ Consensus 2018.NewYork City. Federal BankofStLouis.Presentation Reserve madeto Coindesk 14 May, 2018. the potentialproblems suchasituationcouldcause.Bullard, J. 119 TheFederal BankofStLouisisalready Reserve examining and 38-41. https://mowatcentre.ca/robots-revenues-responses/ & Responses:OntarioandtheFuture ofWork with Alwani,K.andDubrovinsky, M.30July, 2017. –seeJohal,S.Thirgood,of the“dataeconomy” J.andUrban,M. tosystems –onethathasalready occurwiththeadvent started implications ofthetransfer ofvalue into digitallynative value 118 For amore substantive discussionofthetax-specific nature wellinadvance. Number of companies FIGURE 16 100 150 200 250 300 350 50 0

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. Pages 35-36 MN IA MO . NE NV NJ NY governance visit services, to effectively challengegovernment’s monopoliesonanumberof wired.co.uk/article/estonia-e-resident Why notbecomeane-resident ofEstonia.” 122 Hammersley, B.27March, 2017.“Concernedabout Brexit? one-way-to-get-around-brexit-become-an-e-resident-of-estonia/ Become ane-resident ofEstonia.” 121 Anderson,J.19July, 2016.“Oneway to getaround Brexit: central-banking-and-fintech-a--new-world https://www.imf.org/en/News/Articles/2017/09/28/sp092917- Presentation madeto theBankofEnglandConference. London. Fintech—A Brave NewWorld. Fund International Monetary 120 Lagarde, C.29September, 2017. direction is. environment are notyet clear, thetrend inthis presented by thisincreasingly competitive active. countries inwhiche-residents are physically to share tax informationwiththe allnecessary innovative governments. (Estoniahascommitted that embracesdigitizationcanout-competeless and innocuouswarningofhowagovernment e-governance infrastructure are providing anearly consider howthey might respond. Estoniaandits inthesenewtechnologiesand build expertise great thatprudencedemandsgovernments significance aloneofsuchapossibilityisso banking willnotbedisruptedtomorrow, NC OH OK

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53 | THE MOWAT CENTRE 54 | INSIDE THE BLACK BLOCKS Canadian-ness, such as the MAPL systemfor Canadian-ness, suchastheMAPL of broadcast criteriafor contentmetcertain cultural contentby mandatingthatapercentage was abletofostertheproduction ofCanadian challenge. Previously, theGovernment ofCanada the Internetprovides of anexampleofthissort Canadian contentregime forbroadcast mediaby The underminingofthefederal government’s individuals. an objective withoutrestricting thefreedom of Positive approaches, conversely, seektoadvance the freedom ofindividualswithinthesystem. achieve theirgoals by removing orrestricting our usage,negative approaches are onesthat traditionally relied on“negative” approaches. In of existingregulatory frameworkswhichhave watching concernsthedecliningeffectiveness individuals Another aspectofblockchain’s abilitytoempower frameworks “negative” regulatory effectiveness of Decreasing Canada. a Canadiansong.” system-defining Commission. 10August, 2009. “TheMAPL 123 CanadianRadio-television andTelecommunications Canadian contentwould be produced. content, thegovernment wasguaranteeingthat was thatby guaranteeingamarket forCanadian the revocation oflicenses.Thelogicthispolicy the policy, take corrective actionsuchasfinesor broadcasts and,ifabroadcaster didnotadhere to regulator,the industry’s wasableto monitor telecommunications Commission(CRTC), because theCanadianRadio-television and government wasabletoenforce thisrequirement defining aCanadiansong. https://crtc.gc.ca/eng/info_sht/r1.htm vis-à-vis Content Madeby Canadians the state that is worth thestatethatisworth 123 TheCanadian . Government of . Canadian government couldforce theseforeign unacceptable tothepublic,itisnotclearhow restricting accesstotheInternet,somethinglikely their usersdirectly viatheInternet.Without other jurisdictionsandare abletoconnectwith is largely are becausetheseservices basedin a guaranteedmarket forCanadiancontent.This found noway offorcing tocreate theseservices and theGovernment ofCanadahave todate Canadian contentintheirofferings andtheCRTC access content,have noobligationtoinclude and increasing proportion ofCanadiansuseto Netflix andSpotify, whichanalready significant the viabilityofthisapproach. like Services hasdramaticallyundermined and videoservices The arrival oftheInternetandstreaming audio Now, thisnegative approach isbeingundermined. exchanges toachieve theirregulatory objectives. what offerings were allowedtotradeonstock to alarge extenton their abilitytocontrol as theCRTC. Previously, these regulators relied regulators are nowfacingasimilarchallenge based inforeign countries.Canadiansecurities investors keen inunregulated toparticipate ICOs A parallelsituationisplaying outintherushof production ofCanadian content. that governs ittoachieve itsgoalofensuringthe negative Canadiancontentregulatory framework industry, thereby underminingtheabilityof of thehighlyregulated Canadianbroadcasting Internet hasenabledmanyCanadianstooptout By enablingstreaming forinstance,the services, thingswilltendtobeweakened.doing certain barriers toblockindividualsandenterprisesfrom to govern behaviours by coercively erecting more options,regulatory frameworksdesigned individuals are given more toolsand powerful The key pointtodrawfrom thisisthat,as regime. firms toabideby itscurrent Canadiancontent of Canadamightrespond toconcernsabout own cryptocurrency. Similarly, theGovernment popularity ofcryptocurrencies by creating its might seetheBankofCanadaresponding tothe In ablockchain context,suchanapproach providing fundingdirectly tocreators. the creation ofCanadiancontentby, forexample, Canadian content–by proactively supporting objective –namely,policy’s thecreation of content, suchanapproach wouldachieve the encourage desired ones.InthecaseofCanadian unwanted activities,governments take steps to approach where, insteadofseekingtoblock The otheroptionistouseaproactive “positive” authoritarian outrage. for example,wouldlikely bedecriedasan LimitingaccesstotheInternet, its liberties. well inasocietylike Canadathatcherishes cases, suchanapproach isunlikely towork resources devoted toenforcement. Inmany punishments more seriousandincreasing the its functioningby extendingitsrules,making the negative approach andseektoimprove two options.First,they candoubledownon In suchsituations,governments are facedwith verify/introducing-govuk-verify https://www.gov.uk/government/publications/introducing-govuk- 2018. license.Governmenton theirdriver’s 12July, DigitalService. government suchastaxfiling orcheckingtheinformation services, this, citizens canthenusethisverified digitalidentityto access trusted private firms’identityverification systems.Having done to prove theiridentityonlinethrough theuseof oneofafew this direction. Thisprogram, calledGOV.UK Verify, enablescitizens 124 TheUnitedKingdom(UK),forexample,hastaken stepsin governments andregulators can potentially is critical,namelythatby actingproactively, not recommendations thekey underlyingpoint options are presented here asillustrations and rights managementframework. identity asafoundationforbetterdigital creating itsownblockchain-based digital corporate (mis)usesofindividuals’databy Guidance GOV.UK Verify . Government oftheUnited Kingdom. . 124 Whilethese more positive toolsinresponse tothearrival mixes bothnegative andpositive tools.Using have longpursuedadual-trackapproach that With Canadiancontent,forinstance,governments are atleastrecognizable tomostpolicymakers. As novel asmanyofthesechallengesare, they Novel legalquestions rather thanenforcement. achieve its ultimate objective throughinducement its preferred direction, itmay bebetterableto to integratesafeguards orsteertheactivityin doing soinaway thatalsoallowsthegovernment enabling thethingforwhichthere isdemand,but achieve theirgoalsmore effectively. Byoffering or Cryptocurrency. pg.241. 125 QuotedinVigna,P. andCasey, M.2016.TheAgeof computer programs like videogames.But,unlike it canbecomedifficulttodistinguishDAOs from objectives. When thisisallencodedinsoftware, logic andagreements designedtoachieve these skeleton, namelyasetobjectives, somebusiness essentially reduce corporationstotheirlegal Box 7;hereafter, weuseDAO toincludeboth) even potentiallyowners–DAOs andDACs (see for employees, officersanddirectors –and Because ofhowthey wouldremove theneed Matrix.” corporation is...[that’s]like somethingfrom The talking aboutfiguringoutwhatanautonomous from aregulatory standpoint,well,nowwe’re think it’shard tofigure outwhatBitcoinis real precedents. Or, asoneauthorputit:“You novel legalquestionsforwhichthere are no challenges posedby blockchains willbethe Conversely, someofthemostimportant emphasis, notanewdeparture. of streaming represents services ashiftin 125

55 | THE MOWAT CENTRE 56 | INSIDE THE BLACK BLOCKS value system, collectinformationfrom pre- that couldcontrol capitalinadigitallynative the Board contracts –withasetofsmart statement andemployees –andpotentially by thecorporation’s by-laws, mission would replace thefunctionsperformed (DAO) orcorporation(DAC) isanentitythat A distributedautonomousorganization define itsduties. and regulatory frameworkswhichfurther mission statement–supplementedby legal meets itsgoalswhichare usuallysetoutina shareholders forhowwellthecorporation The Board isaccountabletomembersor by laws,regulations andjurisprudence. and withinabusinessenvironment structured specific missionaccording toasetofby-laws managers andotheremployees topursuea consist ofaBoard ofDirectors thatemploys Traditional organizations orcorporations friendly-jurisdictions-malta-stands-out/ Out.” Coindesk. 2018. “AmongBlockchain-Friendly Jurisdictions,MaltaStands A.4July,same rightsandduties.SeeRonstedt, M.andEggert, as similarto atraditionallimitedcompanywithmanyof the DAOs/DACs (whichitrefers to as“technological arrangements”) 126 Maltahasrecently adoptedalegalframeworkrecognizing theoretical, entitiesisunclear. current legalstatusofsuch,stilllargely equivalent toa traditionalcorporation,the regulatory frameworks. Whilefunctionally its objectives withintheapplicablelegaland making investments, designedtoadvance the DAO/DAC wouldtake actions,suchas algorithms. Onthebasisofthisanalysis this informationusingmachinelearning specified sources viatheInternet,analyze Corporation (DAC) Organization (DAO) or Distributed Autonomous BOX 7

https://www.coindesk.com/among-blockchain- . 126 from actingwithin their borders? stopthem how couldonecountry regulations beenforced? Ifnot, they be regulated? How could such be allowed?Ifyes, howshould vehicles. devices like autonomous control over Internet-connected to purchase orexercise services native assetscouldenablethem is becausecontrol over digitally to actinthephysicalworld.This national domicilebutstillbeable entirely onablockchain, have no be completelydecentralized, exist current videogames,DAOs could news/technology-30998361 themselves?”News. February, 2015.“Coulddriverless carsown to marginalized communities.Kelion, L.16 mandated to provide inexpensive mobility learning algorithms,couldbecreated and profit DAOs anddirected machine by powerful that suchvehicles, legallyownedby not-for- 127 Somethinkers have already suggested enabled smart-contract-powered tested anautomatedEthereum- French insurer AXArecently already beginningtoappear: contractsarebased smart holistically. Infact, blockchain- technological innovations approaching theseinterconnected of highlight theimportance deployment, they helpfully more widespread andpowerful how blockchain enablestheir blockchain but,becauseof are aninnovation separatefrom contracts contracts.Smart smart of themuchwiderconcept extreme potentialapplications DAOs are onlyoneofthemore 127 Shouldsuchcreations BBC . http://www.bbc.com/ . written into smart contracts,itmay written intosmart benecessary may bepossibletoensure optionslike thisare Whileit by oneoftheparties. to performance breach ofcontractmay beapreferable alternative Similarly, compensationfor sometimesmonetary backed order. by acourt such nullificationmay notbepossibleeven if on a domicile-less global blockchain,performance of law. contractfor But,ifuploadedasasmart would beacandidatefornullificationby acourt example, anycontractagreed tounderduress unintended or in conflict with other laws. – even if the results end up being monstrous, of the contract done to stopautomatic performance however, itmay bethecasethatnothingcan is self-executing andhostedonablockchain, mitigating circumstances arise.Ifacontract if necessary, suchaswhenextenuatingor ofacontract intheperformance to intervene enables humandiscretion andcommonsense quasi-judicial agenciesby humanslike judges questions. Currently, thecontrol and ofcourts contractsraiseanumber ofimportant Smart hours late. automatically iftheirflightwasmore thantwo flight insurancepolicythatpaidcustomers attention. 129 TheauthorsthankKatieSzilagyi forbringingthisissueto our insurance-product/ www.coindesk.com/axa-using-ethereums-blockchain-new-flight- Blockchain foraNewFlightInsuranceProduct.” 128 Higgins,S.13September, 2017.“AXAIsUsingEthereum’s questions oftransparency andequityintheuse with issueslike –include automaticperformance could sharpen–especiallywhenthey intersect Other emerging challengesthatblockchains contract. smart represents oneofthekey motivations forusing a given thatincreasing automaticitywouldlikely of thistypeforthemtoactuallybeincluded to legallyrequire inclusionof“escapeclauses” 128 . Coindesk 129 For . https:// responses. the publicandactively pilotingpotential capacity, consultingwithstakeholders, educating thinking ahead,aggressively developing theirown transition, governments andregulators needtobe the harmthatiscausedduringthisperiodof frameworks fortheseareas. Inorder tominimize legislators tofigure outtheoptimalgovernance it willtake regulators sometimeforcourts, and of anynewarea orformofhumanactivity. But corollary oftheemergencepuzzles isanecessary not outofalarmism:theposingnovel legal a convict’ssentence. oracarloantothelength of gets ajobinterview of algorithmstodetermineeverything from who named “TheDAO”. autonomous corporationthatwasgenerically, andconfusingly, 131 Note,inthiscase“TheDAO” refers to aspecificdecentralized Books. Increases InequalityandThreatens Democracy. 130 SeeO’Neil,C.2017. transferring around of $55million(USD)worth Ethereum blockchain –and “tricked” itinto corporation thathadbeenbuiltontopofthe that comprised“TheDAO” –anautonomous hackers contracts exploitedaflawinthesmart of blockchain governance. governments willneedtothinkaboutinrespect a helpfulexampleofsometheissuesthat The infamoushackof“TheDAO” in 2016 provides ought tobegoverned. question ofhowtheseproviders andservices with thesenewproviders, italsoraisesthe the questionofhowgovernments mightcompete raises governance Whilethiscertainly services. create competitionforstatesinthemarket for We describedearlierhowblockchains may Governance Weapons ofMathDestruction:HowBig Data 130 We raisethesequestions 131 Inthiscase, NewYork: Broadway

57 | THE MOWAT CENTRE 58 | INSIDE THE BLACK BLOCKS ether inquestiontorecover it. contested fundstoallowtheformerownersof at apointpriortothehackers’ transfer ofthe “hard fork”theunderlyingEthereum blockchain The Ethereum communityeventually decidedto larger Ethereum project simplyby association. this incidentwouldcauseirreparable harmtothe had notbeencompromised andwasnotatfault, despite thefactthatEthereum platformitself Ethereum concernedthat, communitywasvery money were understandablyupset.Moreover, the Nevertheless, investors in“TheDAO” wholost thus legal. with thecontractsthatgoverned “TheDAO” and capable ofdoingwouldbe,by definition,inline to thisinterpretation, anythingthesoftware was by thelogicencodedinthissoftware. According its purposesandoperationswere superseded that anyotherinformationaboutthecorporation, between thecorporationandinvestors and itself theauthoritative version ofthecontracts that thesoftware thatcomprised“TheDAO” was the creators of“TheDAO” hadspecificallystated that nolawswere broken by thehackers because ether toanaccountthey controlled. forks” whichdonot. compatibility withprevious versions ofthesoftware –and“hard “soft forks”–whichrefer to changesthatmaintainbackwards changes to theblockchain’s operatingsoftware are calledeither underlying software of thatoperatedtheblockchain. Thesesorts transactions, thisforkalsoinvolved simultaneouslychanging the the blockchain andforkingitatanearlierpointintherecord of in Section3except thatinadditionto goingbackintimeon 133 The“hard fork”describedhere issimilarto theforkdescribed theft-property economics/21701136-cyber-attacker-outsmarts-smart-contract- Economist 132 TheEconomist. 25June,2016. “Theftisproperty.” miners andusersbalked, however, andsuggested the newversion ofEthereum. Asmallminorityof agreed tomove forward withthehard forkand two distinctblockchains. Mostminersandusers resulted inasplitoftheEthereum blockchain into This decisioncreated amajorcontroversy and . https://www.economist.com/news/finance-and- . 133 132 It’slikely The “The DAO” istoremove humandecision- arbitrary entire pointofanautonomousorganization like This controversy largely turnsontheideathat funds. hackers were stillinpossessionofthe“stolen” came tobecalledEthereum Classic,onwhichthe old version oftheEthereum blockchain, which resistance anddecidedtocontinueusingthe doing sobetrayed theentire ideaofcensorship everyone else. reading “TheDAO’s” fineprintmore carefully than hackers whohaddonenothingwrong beyond that constitutedatheftof$55millionfrom the a mob-mandatedretroactive changingofthelaw that thehard forkwasessentiallyanalogous to and Vigna,P. 2018. 136 AnaccountofBitcoin’s “CivilWar” canbefoundinCasey, M. com/2000/01/code-is-law-html Cyberspace.” 135 Lessig,L.1January, in 2000.“CodeIsLaw:OnLiberty bet-cold-hearted business/21702758-time-being-least-human-judgment-still-better- The Economist 134 Schumpeter. 28June,2016.“Not-so-clever contracts.” as governance istraditionallyunderstood. infrastructure intheBitcoincommunity–atleast these conflictsalsoexposedalackofgovernance Gold. Whilelessacutethan“TheDAO” incident, of thecurrency suchasBitcoinCashand to hard forksthathave created alternateversions block size shouldbeincreased –whichhave led disagreements –largely concerningwhether problems. Bitcoinhasalsoexperiencedanumber Ethereum isnotaloneinhaving facedsuch or decision-makingprocesses. without anypre-existing agreed-upon governance the decisionwasmadecreated onthefly unexpected andtheentire procedure by which need tohard forktheEthereum blockchain was Indeed, becausecodewasmeanttobelaw, the making andrecognize that“codeislaw.” Harvard Magazine . https://www.economist.com/news/ . 134 The Truth Machine Thissmallminorityargued that . . https://harvardmagazine. . Pages 71-79. 135 136

governance. For instance,howlarge aproportion desire orneedtobecomeinvolved inblockchain where they findthey have amuchstronger and politicalprocesses. Situationsmay arise results oftheirowndecision-makingprocedures is notdesirableinallcasesofconflictwiththe that theuseofa“vote withyour feet” approach andubiquity,importance, governments may find In fact,asblockchains continuetogrow insize, spread ofthisapproach. to thinkthrough thepotentialimplicationsof clear thatgovernments are onlyjustbeginning exciting it’spretty tosome,especiallylibertarians, to implementthanpreviously. Whilethismightbe a contextwhere digitaltoolsmake itmucheasier is anovel way togovern acommunity, at least in shop around forthegovernment they like best– e-residency’s limitedempoweringofindividualsto to governance –whichonecanalsodiscernin this emerging “vote withyour feet” approach anyone touseanyoftheseblockchains. But is actuallyquitedemocratic–nooneforcing they wantedtocontinueusing.At onelevel this themselves whichversions oftheseblockchains by having theusersandminers decidefor Ultimately, allthesecontroversies were resolved short ofwalkingawayshort from it. procedure forhowthatcodecanbechanged a fair, predictable, transparent anddemocratic eventually –andreasonably – wantthere tobe then thosewhoare impactedby the codewill some control over thecurrency? Ifcodeislaw, decides itneedstofindsomeway toexercise conducted usingBitcoinbefore thatcountry economic activitywillneedtobe of acountry’s only asub-setofhostquestionsthatcould your feet” approach togovernance represent The questionsraisedby thisincipient“vote with others do. not inequitablydisadvantaged, regardless ofwhat responsibility toensure thattheseindividualsare ability towalkaway andgovernments have a a variety ofreasons, noteveryone hasthesame or obligationsunderinternationaltreaties. For ways thatadhere toconstitutionalrequirements arethese services delivered totheircitizens in wash theirhandsoftheneedtoensure that competitors, governments willnotbeableto market forsome“governance tonew services” Moreover, even ifthey endupcedingthe which decisionsaboutthemare taken. questions make itontotheagendaand forain This willinvolve workingtoinfluencewhenthese shape thedecisionsthatwillneedtobetaken. activelyabout them,buttoalsostart working to governments needtonotonlybeginthinking to bedetermined,onethingthatisclear While theanswerstothesequestionsremain distributed entitieshave nonationaldomicile? viablockchainservices if thesedecentralized, might governments stopDAOs offering illegal with non-humanDAOs? Alternatively, how that operateblockchains –orconceivably accommodations withtheprivate networks blockchain? Howshouldgovernments reach (GDPR) begiven effect onanimmutablepublic by theEU’sGeneralDataProtection Regulation instance mightthe“righttoerasure” guaranteed which governments willneedtorespond. How for be raisedby theemergence ofblockchain andto

59 | THE MOWAT CENTRE While blindly copying other jurisdictions is likely not the answer, changing the negative perception held by many blockchain innovators and entrepreneurs ought to be a priority for Canada’s governments and regulators. 60 | INSIDE THE BLACK THE INSIDE | 60 BLOCKS 6 offered by blockchain andavoid itspitfalls. governments capture thepotential benefits Implementing theserecommendations willhelp » » » » » following five recommendations topolicymakers: In thisfinalsubstantive section,weoffer the theindustry.pervade skewed perspectives andself-promotion that ofsometheexuberance, of theneedtobewary to getamove on,certainly, butalsoasareminder a reminder thatevents are moving fastandaspur we suggesttakingthisquotationastookit: true thatgovernment hassomecatchinguptodo, can bedeflatingandconcerning.But,whileitis engagement with blockchain, this type of response If thisreport represents your firstthorough was saying that ifyou are not already up to speed on blockchain, you might as well not even to catch up. try in thegamewhenthere are lotsofothersthathave doneextensive research?” Itwasalmostasifhe blockchain entrepreneur foraninterview, hisresponse wastoask:“Whyare you doingresearch solate Developments intheblockchain communityare moving quickly. very Whenweapproached one » » » » » cooperation Foster nationalandglobal governance Make useofstandards andotherflexibletools internalandalliedexperimentation Support innovation Create anattractive environment forblockchain Build internalcapacity RECOMMENDATIONS blockchain-engineers-are-in-demand/ demand.” 137 Stein,S.14February, 2018.“Blockchain engineersare in » taken initialsteps: someimportant their internalcapacity. Indeed,manyhave already alive tothischallenge andtheneedtoincrease It isencouragingthatCanadiangovernments are challenges thatflowfrom it. and implications andthepotentialopportunities government whounderstandthetechnology, its of technologistsandpolicymakers within first instance,thismeansbuildingupgroups is toincrease theirowninternalcapacity. Inthe take inpreparing fortheimpactsofblockchain One ofthefirststepsthatgovernments needto governments andregulators iscurrently limited. blockchain andcapacitywithinCanadian expertise it shouldnotbesurprisingthatthelevel of Given thatblockchain issuchanewdevelopment, Build internalcapacity » government partners. with anumberofprovincial andmunicipal blockchain proofs ofconceptandpilotprojects Canada hasbeeninvolved in asapartner Innovation, ScienceandEconomic Development TechCrunch . https://techcrunch.com/2018/02/14/ . 137

61 | THE MOWAT CENTRE 62 | INSIDE THE BLACK BLOCKS » » » » project/ coindesk.com/project-jasper-lessons-bank-of-canada-blockchain- Bank ofCanada’s FirstBlockchain Project.” 138 Wilkins,C.19May, 2017.“Project Jasper: LessonsFrom » » » » » » Verified Organization with Network(VON) British Columbiawillsoonbelaunchingits As notedinsection5,theGovernment of blockchain applicationsingovernment. that generatedanumberofideasforother also recently ranablockchain hackathon permitting process. TheGovernment ofOntario ease ofuseandefficiencyfortherestaurant of blockchain technologyinincreasing the concept designedtoinvestigate potentialuses Ontario andtheCityofToronto ranaproof of As discussedinsection5,theGovernment of already disclosespublicly. grant andcontributionagreements whichit blockchain asaway ofexecuting andposting has experimentedwithusingtheEthereum The NationalResearch CouncilofCanada technology. the federal government’s understandingofthe and aBlockchain Day conference toadvance Government ofCanadaBlockchain Codefest Treasury Board Secretariat recently hosteda operator TMX Groupoperator TMX Ltd,isfocusedontesting Payments Canada andToronto Stock Exchange with on whichtheBankofCanadaispartnering settlement instrument. of a“CADcoin,” aDLT-based interbankpayments second stagesinvolved thebuildingandtesting firstand institutions andactors.Jasper’s Bank ofCanadaandavariety ofotherfinancial Project Jasperisajointinitiative betweenthe credentials tothird parties. to usetheirowndigitalwalletsprove their eventually, enablingindividualsandbusinesses other “verifiable claims”onablockchain and, the aimofputtinggovernment permitsand . 138 Jasper’s third Jasper’s stage, Coindesk . https://www. » » Additionally, governments shouldpursue: – are tobuildingcapacity. criticallyimportant any initiative thatprovides hands-onexperience proofs ofconceptandpilotprojects between government anddisruptive technologies, recommended inthecontextofrelationship to continueandmultiply. Aswehave previously These are allpositive stepsbutthey willneed Pages 28-29. 140 Johal,S.andUrban,M.11,May, 2017. test-blockchain-for-securities-settlement-idUSKBN1CM30X com/article/us-boc-tmx-grp-blockchain/bank-of-canada-tmx-to- blockchain forsecuritiessettlement.” Reuters. 139 ReutersStaff.17October, to 2017.“BankofCanada,TMX test procure, implementandmanageblockchain essential forgovernments tobeable to identify, capacity. Whilesometechnicalcapacitywillbe go beyond simply buildinginternaltechnical Critically, theserecommendations needto » » » » » » » » Fellowships andotherprograms designedto firms andorganizations by government staff. interchanges withexternalblockchain andDLT Greater encouragementofsecondmentsand settlements process. the useofDLT forimproving thesecurity capacity inblockchain andDLT. targeted atenhancing government employees’ like micro-credentials andnano-degrees Better integrationofnewlearningopportunities and DLT knowledgeandskills. educational leaves toupgradetheirblockchain existing government employees topursue Greater for, encouragementof,andsupport time orforaspecificblockchain orDLT project. ingovernmenta “tourofduty” forasetperiodof programs forprivate sectortechnologiststodo Specific, carefully designedandwell-supported work inthegovernment forasetperiodoftime. attract academicswithblockchain to expertise 139 Regulating Disruption https://www.reuters. 140 –really . . could even bedirected todevelop aninternal organs, suchasOntario’s Policy Innovation Hub, on thepolicyside.Existinginnovation be afocusforcapacitybuilding,especially centralagenciesshouldalso departments, Given theircentralrole other supporting government agencies. services uses forthetechnologysuchasshared and entities thathave themostobvious immediate such assecuritiescommissions,wellthose already confronting thesenewdevelopments This listoughttoincluderegulators thatare blockchain’s emergence shouldbeprioritized. associatedwith the challengesandopportunities ofgovernmentthose parts thatwillgrapplewith of fiscalrestraint, buildingupthecapacityof Given thatgovernments existinanenvironment throughout government andsociety. non-technicalimplications of thetechnology’s build familiarityandupgradeitsunderstanding to upgradeitstechnicalcapacity, itneedsto and thelaw. Notonlydoesgovernment need creates lieinitsimplicationsforpolicy, regulation challengesthistechnology the mostimportant and DLT usecasesinthepublicsector, manyof into theirdecision-makingwillalsobecritical. integrate blockchain andDLT-related policyadvice sufficient level sothatthey are abletoeffectively senior executives understandblockchain ata ofgovernment.other parts Finally, ensuringthat government consultancyfunctiontosupport actually have ausecase’ forblockchain? Is build capacity, itiscriticaltoask“dowe that even before anorganization to starts Finally, oneofthisreport’s reviewers suggested of ouradditionalrecommendations. critical tothesuccessfulimplementationofmany precisely ofindividualswhowillbe thesesorts presents forsocietyatlarge. Moreover, itis thatthetechnology and seize theopportunities and legalframeworkstoaddress thechallenges but alsohowitmodifiesitspolicy, regulatory not justhowgovernment itselfusesblockchain, ultimately, beeven more formanaging important technical aspectsofthetechnologywill, Building astrong understandingofthenon- need. (yet?) justifytheirownbuild-upofcapacitywill andagencies thatcannot individual departments ofanalyseswhich able tofacilitatethesorts developing nimbleandre-deployable capacity a whole,andcentralagenciesinparticular, ofgovernmentunderlines theimportance as a significantlevel ofblockchain This expertise. able toanswerthesequestionsitselfrequires in-house blockchain capacity. Awkwardly, being government oragencywillrequire department questions toaskanditistruethatnotevery to existingapproaches?” Theseare critical offers substantially superiorresults compared blockchain relevant toourworkin a way that

63 | THE MOWAT CENTRE 64 | INSIDE THE BLACK BLOCKS “Crypto Valley”“Crypto foritsgovernment’s enthusiasm Zug inSwitzerland has,forexample,beendubbed significant stepsinthisdirection. Some otherjurisdictionshave already taken and innovators andretaining them. capable ofattractingblockchain entrepreneurs governments’ abilitiestocreate anenvironment maintaining thissector, however, willdependon described above. Successfullybuildingand inmany ofthewaysthis sectoranditsexpertise sector, governments shouldbeabletoleverage and by buildingstrong relationships withthis blockchain ecosysteminCanada.Bydoingso, aninnovative tobuildandsupport opportunity talent, strength ofCanada’s homegrown blockchain blockchain innovators. the private sectorforthebestandbrightest that government willbeabletocompetewith internal capacity, itisunrealistic toexpect Even withacommitmenttoincreasing blockchain innovation environment for Create anattractive cryptocurrency-bermuda-malta-gibraltar.html York Times Company? Bermuda,MaltaorGibraltar Wants You.” 144 Popper, N.29July, 2018.“Have a Cryptocurrency superclustersinitiativeshortlistofapplicants.htm science-economic-development/news/2017/10/innovation_ missed opportunity. See government’s supercluster selectionprocess represents a supercluster applicationto even inthefederal make theshortlist 143 Inthislight,thefailure oftheproposed blockchain blockchain-billed-as-next-generation-internet-tech.html com/business/2017/02/28/ottawa-explores-potential-of- generation Internettech.” 2017. “Ottawaexplores potentialof‘blockchain,’ billedasnext- accounting formuchofthisactivity. Blatchford, A.28February, behindtheUSAandUKwithTorontostart-ups area 142 Canadawasranked third intermsof the numberofblockchain “Blockchain engineersare indemand.” every oneblockchain developer.” SeeStein,S.14February, 2018. with“14jobopeningsfor 141 Indeed,demand“isoffthecharts” for encouragingblockchain andrelated firms 142 . Canadiangovernments have agood https://www.nytimes.com/2018/07/29/technology/ https://www.canada.ca/en/innovation- The Toronto Star 141 But,given therelative . https://www.thestar. 144 . l. 143 Thetownof The New . ledger. corporate shares usingablockchain-based explicitly allowcorporationstomaintaintheir wasthefirstjurisdictioninworldto courts, ofitsbusiness formation andtheexpertise build onitsexistingdominanceincorporate example, theUSstateofDelaware, seekingto being oneoftheworld’sblockchain hubs.For Other jurisdictionsare alsostakingclaimsto town ofjustunder30,000people. 2017’s tenbiggestICOswere basedinZug –a this approach, itisnotsurprisingthatfouroutof local government formanytaxes andfees. Given accept payment inbitcoin,butsotoodoesthe to locatethere. Notonlydomanylocalstores 308_securities-law-implications-for-offerings-of-tokens.htm http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20180611_46- Law ImplicationsforOfferings of Tokens.” 148 CanadianSecuritiesAdministrators. 11June,2018.“Securities 23%202018.pdf?1521837416 publications/17844/original/stromberg%20Law360%20March%20 Initiative?” 2018. “Are HeadwindsHamperingDelaware’s Blockchain 147 Stromberg, T. Negre, J.Reinhardt, M.Peleg, M.23March, Eat Delaware’s Lunch.” 146 Adlerstein,D. andTinianow, A.21April,2018.“WhyICOsCould reinvent-itself finance-and-economics/2018/02/24/a-banking-centre-seeks-to- to reinvent itself.” 145 TheEconomist. 24February, 2018.“Abankingcentre seeks security token –asignificantregulatory step. being adifference betweenautilitytoken anda notice, iteven recognized thepossibility of there evolution ofregulators’ views.Initsmostrecent entrepreneurs andfirmswithinsightintothe has produced anumberofstaffnoticestoprovide provincial andterritorialsecuritiesregulators – (CSA) –anumbrella organization forCanada’s instance, theCanadianSecuritiesAdministrators regulators are tomove trying inthisdirection. For Encouragingly, Canadiangovernments and technology. to enableshareholder voting through blockchain often interactwithshares onthisblockchain and legaldocumentsthat and maintenanceofcertain 146 Law360 Itisalsolookingatenablingthecreation . 147 The Economist . https://jenner.com/system/assets/ . . https://www.economist.com/ CSA StaffNotice 145

46-308. . 148

answer, changing thenegative perception heldby blindly copying otherjurisdictionsislikely notthe attractiveness amongentrepreneurs. While persisted here haseroded someofCanada’s thathas to Canada,theregulatory uncertainty challenges posedby blockchain are notunique Unfortunately, even thoughtheregulatory it enjoyed inblockchain even justafew years ago. that Canadahaslostmanyoftheadvantages that declared bluntlythat “thebraindrainisreal” and another, more jurisdiction. supportive, good possibilitythatthey wouldhave moved to time thatthisreport waspublished,there wasa unclear guidance.Oneeven suggestedthatby the unresponsiveness from regulators aswell encouraging. Somecomplainedofdelays and and regulators hadnotbeenparticularly their interactionswithCanadiangovernments active intheblockchain sectorsuggestedthat whoaredigital assets.Manyofourinterviewees currently seenasaleaderintheregulation of Canadaisnot Despite theselaudableefforts, innovators. be flexibleandmeettheneedsofblockchain another goodexampleofregulators seekingto The CSA’sregulatory sandbox (seeBox 8), blockchain innovation. with caution,even if it meanslosingoutonsomehomegrown represents, atleastpartially, aconsciousdecision to proceed imprudently. Thus,Canadianregulation ofdigitalassetsalsolikely engaging ina“raceto thebottom” andreducing theirregulations that somejurisdictionswithmore laxapproaches are actually the mostrecent globalfinancialcrises.Itmay alsobethecase to financialregulation, anapproach thatwasmuchlaudedduring innovations are inlinewithCanada’s generallyprudentialapproach 151 To befair, Canadianregulators’ responses to blockchain seeks to reinvent itself.” 150 SeealsoTheEconomist. 24February, 2018.“Abankingcentre resources.aspx?id=1588 149 See and regulators. ought tobeapriorityforCanada’s governments many blockchain innovators andentrepreneurs https://www.securities-administrators.ca/industry_ 151 . 150 Another 149 is or induration.Thepurpose transactions orcustomers– number of to acertain delimited inscope–up offered tofirmsisusually requirements. Therelief regulatory orlegal certain exemptive relief from enrolled firmstemporary regulator whichprovides A program operatedby a should consider. regulatory changes they innovations andpotential regulators tolearnaboutnew consumers andenabling innovation, protecting as ameansoffacilitating with successfulapplicants engagement by theregulator with tailored andongoing environment willbecoupled this relaxed regulatory legal frameworks.Ideally, by existingregulatory or bediscouraged otherwise whose development might products andservices innovative andbeneficial to testnewandpotentially enable successfulapplicants of aregulatory sandbox isto Sandbox Regulatory BOX 8

65 | THE MOWAT CENTRE 66 | INSIDE THE BLACK BLOCKS technical indicatorstoprovide thisinformation, sophistication mightbetoallowfirmsuse some oftheirKYC requirements around investor that acreative way forblockchain firmstofulfil suggested diligence activities.Ourinterviewee of documentationandnumerous otherdue time andinvolve questionnaires, thesubmission such “client-onboarding” cantake significant offerings tothiscustomer accordingly. Currently, and level ofsophisticationandtothentailortheir strategies,expectations understand aninvestor’s is a requirement for the institution to take steps to product beingoffered, orservice ofKYC onepart (KYC).“know your customer” Dependingonthe regulatory responsibilities collectively called Many financialinstitutionshave asetof accomplished, considerthefollowingexample. were beingapplied.To seehowthismightbe the principlesbehindtheseregulatory regimes thinks aboutblockchain whilestillensuringthat itself with theway community” thatthe“crypto aligning regulatoryrequirements forinnovators andfindwaysway of ofdoingthiswouldbetotry useful suggestedthatoneparticularly interviewee for innovation istogetmore creative. One One way tobuildamore attractive environment regulatory burden onfirmsand customers,while due diligencewouldbethat itcouldreduce the for usingsuchanapproach ofKYC asapart higher level ofsophistication.Themotivation exchange wouldbetaken toindicateaneven transaction insteadofanaccountatacrypto- use by abuyer in this ofapersonalcrypto-wallet than average level ofinvestor sophistication.The card, thiswouldbetaken toindicateahigher as opposedtoafiatcurrency-denominated credit cryptocurrency topurchase anothercrypto-asset, For instance,ifabuyer wantedtousea community.thinking inthecrypto an approach thataligns withalotofcurrent go alongway tobuildingtheserelationships Innovation Fellows program intheUS, of personnellike the successfulPresidential specifically thosethatencourageexchanges of thecapacitybuildingtoolsidentifiedearlier, and entrepreneurs andtechnologists.Some relationships betweenpolicymakers, regulators to increase tobuildastrong efforts networkof way toidentifycreative ideaslike thiswouldbe ofcreativesort thinkingbeingadvocated. One recommendation, butasanillustrationofthe This ideaisnotoffered asaspecific level sophistication. oftheinvestor’s regulatory framework,namelytodeterminethe still achieving theunderlyingobjectives ofthe Pages 18-19. 153 Johal,S.andUrban,M.11,May, 2017. program-is-back-in-house statescoop.com/effort-to-codify-presidential-innovation-fellows- Innovation Fellows program isbackinHouse.” 152 Ehlinger, S.9January, to 2017.“Effort codifyPresidential challengefunctionforproposedimportant aswellofferingadditional expertise, an asconduitsto sector intelligenceandserve These committeescouldoffer technicaladvice, contact withpolicymakers workinginthespace. potential blockchain implementationsinto community memberswithastake inspecific designed tobringindustry, consumer, and be tocreate committees standingadvisory Another positive stepthatcouldbetaken would challenges thetechnologywillcreate. of blockchain, given themanynovel regulatory inthecase insight willbeespeciallyimportant regulatory innovation andattractiveness. of exchanges whichcouldboostCanada’s of regulatory capture, itisexactlythesesorts than entrepreneurs andshouldthusbewary have different prioritiesandresponsibilities While governments andregulators willoften and aculture ofinnovation withingovernment. . Regulating Disruption. Statescoop. 152 could 153

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piloting liewithmunicipalgovernments that oflow-riskimplementations idealfor the sorts assomeofthebestcandidatesfor important help spread Thisis riskbetweenthepartners. but workingcollaboratively, theseprojects can high.Moreover,become very local by starting to develop before internalexpertise thestakes governments limitriskandenablethemselves small, a networkofmedicalclinics.Bystarting of connectedinstitutionssuchasahospitaland at alocallevel withasmallset orinpartnership pilotsmightbeespeciallyproductiveSupporting broader publicsector. potential usecasesofblockchain andDLT inthe stakeholders thepilotingof istoactively support internal capacityandbetterrelationships with governments andregulators tobuildimproved As washighlightedearlier, oneeffective way for allied experimentation internaland Support with amore robust interlocutor. couldalsohelptoprovideindustry government Increased self-organization withintheblockchain government blockchain applicationsorpolicies. as they worktoscale uptheirbusinesses. – somethingthey argue disadvantages them institutional reference customerslike government entrepreneurs inCanadais thatthey lacklarge complaints mostoftenheard from technology sector firmsandentrepreneurs. Oneofthe and gainexperiencecollaboratingwithprivate multiple levels ofgovernment toconnectwith ofprojectsThese sorts wouldalsoenable levels ofrisk. tolearnwithonlylow by gainingtheopportunity would benefitfrom providing fundsandexpertise needed. Federal andprovincial governments lackthefundsorexpertise might otherwise technology systemsofthistyperarely workswell repeated failures, delivering massive information in asingle“BigBang.” Asdemonstratedby aimed atreplacing numerous legacysystems attempt todevelop large blockchain solutions Finally, thatgovernments itisimportant donot remaining inCanada. these companiesscaleuptheiroperationswhile homegrown andhelp technologystart-ups governments’ oft-stateddesires to nurture approach wouldalsohelptoadvance Canadian larger inthefuture. partnerships Suchan andtrusttheyexpertise needtomove onto complaints like thisandbegintobuildthe By piloting,governments couldrespond to highly complicatedsystem-wideoverhauls. over time,thereby avoiding theneedforriskyand coordinate othersystemsandexpand organically is howthey canbedesignedtoconnectand suitabletosuchanapproachthem particularly characteristics ofblockchain andDLT thatmake systems are more likely tosucceed.Oneofthe procurement schedulesandlifecycles ofexisting iteratively inways thatgraduallyintegratewith with smallscaletestsandare designedtogrow or stays onbudget.Nimbleapproaches thatstart

67 | THE MOWAT CENTRE 68 | INSIDE THE BLACK BLOCKS blocking thelistingofasecurityonanexchange, its traditionalnegative tools,suchasfinesor it isessentiallyimpossiblefortheOSCtouse to whichtheOSC’sauthoritydoesnotextend, via theInternetandbasedinotherjurisdictions But, given thatmanyICOsare bothaccessible to protect investors from ofscams. thesesorts Securities Commission(OSC) thatare mandated there are regulatory bodiessuchastheOntario ground, someare clearlyfrauds. are helpinginnovators gettheirideasoffthe tools are neededis ICOs.WhilemanyICOs One goodexampleofacontextinwhichnew the adoptionofsomenewtools. this willlikely meansomeshiftsinemphasisand the publicinterest inthischangingenvironment, governments andregulators lookingtoprotect emergence ofseveral novel legalquestions.For of negative regulatory approaches andthe likely entail areduction intheeffectiveness As wasdiscussedinSection4,blockchain will flexible tools standards andother Make greater useof services. See services. similar linesforaccrediting firms offering sharingeconomy 155 IntheUK,TrustSeal standard hasbeendeveloped along com/story/cryptocurrency-scams-ico-trolling/ Just Straight-upTrolling atthisPoint.” 154 Matsakis,L.30January, 2018. “Cryptocurrency Scams Are accreditation. meet inorder tohave theiroffering receive ICOswouldneedto that firmsundertaking requirements around disclosure andreporting publicize astandard that included asetof in thisregard. Theideawouldbetocreate and alternative, positive approach exploring worth The development ofstandards represents an to protect investors. https://sharingeconomytrustseal.com/about/ 155 AlistofICOsachieving thislevel Wired 154 . https://www.wired. . Ostensibly, . of sittingonthesidelines,regulators wouldbe market. Byreconsidering theirapproach instead motivated individualsfrom inthis participating is littlethatregulators willbeabletodostop that there isagrowing appetiteforICOsandthere becausetherealityand OSC.Thisisimportant is in cooperationwithorganizations like theCSA impaired. Ideallystandards couldbedeveloped to respond effectively toICOshasbeengreatly situation inwhichsecuritiesregulators’ ability would likely bemuchbetterthanthecurrent regulatory toolswere inearliertimes,butthey Standards mightnotbeaseffective asnegative blockchain maintainedby regulators. of accreditation couldeven behostedonapublic potential. a significantrole inunlockingblockchain’s full of widelyacceptedcrypto-standards could play move between blockchains, thedevelopment assetsto with eachotherandenablingcrypto allowing different blockchains tointegrateeasily ofinteroperability.to seetheimportance By to unlockingtheInternet’spotentialinorder common protocols like TCP/IP were critical thantheexample ofhow need looknofurther in order tomaximize theirusefulness.One will needtobecompatibleandinteroperable in thefuture. Inthiscontext,blockchains there willbemany, manyblockchains operating permissionless blockchains, itislikely that the challengesaround thescalabilityofpublic, terms ofimpact.For instance,given someof blockchain isabletoreach itsfullpotentialin standards willalsobeessentialinensuringthat In additiontoproviding ahelpfulregulatory tool, rein insomeoftheexcesses ofthesector. not beanidealsolution,itcouldatleasthelpto thereotherwise wouldbenone.Whilethismay able tooffer someformofprotection where could beuseful.Indeed,there are already contracts, oreven opensource modelcontracts, entails. Thecreation ofstandards forsmart system andtheemergence contracts ofsmart that thedevelopment ofadigitallynative value confront someofthemore novel legalquestions Farther alongtheline,governments willneedto influence howthesedecisionsare made. fornationalgovernmentsno opportunities to consequentialdecisionswithlittle-to- very essentially nodemocraticlegitimacy, tomake with unclearaccountabilitystructures and are neworganizations, willingtoallowvery governments willbeforced todecideifthey blockchains like Ethereum grow inimportance, a standard settingrole sofar. Regardless, as has notbeentoomuchconcernaboutitplaying perceived asplaying afairlybenevolent role, there is anot-for-profit foundationthatisgenerally an ICO. Given thattheEthereum Foundation most popularstandard conducting forstart-ups Ethereum blockchain. TheERC-20standard isthe – thebodythatmore-or-less administersthe standard developed by theEthereum Foundation can befoundinthecreation oftheERC-20token One exampleofhowthisisalready occurring 156 See contract couldbesigned. signalled totheuserand justifiedbefore the the modelcontractwouldneedtobeexplicitly could bearequirement thatanydeviations from for thepublicgood. by government orregulators toensure respect independent organization thatisscrutinized be standardized ofan underthesupervision show howaspecificformoflegalcontractcan (MISMO) hascreated asetofstandards that StandardsIndustry MaintenanceOrganization examples todrawon.IntheUSA,Mortgage http://www.mismo.org/ 156 Inthisapproach, there . Foster nationaland tools they couldusetoprotect themselves. measures toprovide individualsandfirmswith unenforceable prohibitions andtowards proactive this approach wouldbetomove away from the specificformittook,key feature of typesofcontractualterms. certain programmed of toblocktheperformance contractscouldalsobeexplicitly that runsmart adherence tospecificstandards. Blockchains contractsfor capable ofscanningsmart academics tocreate opensource algorithms regulators couldconsiderworkingwith might require inventiveness. For instance, Whatever standards are adopted,enforcement contract wasad hoc andappliedretroactively. Ethereum, thoughthedecisionnotto enforce thetermsof the 157 Thisisarguably whatoccurred in“TheDAO” debaclewith that advantage them,oftenattheexpenseof differences in jurisdictions’regulations inways individuals, networksandfirmscanleverage arbitrage. Jurisdictionalarbitragerefers tohow dimensions. Thefirstoneisfamiliar: jurisdictional faces three mainchallengeswithinternational With regard toblockchain Canada currently will create. challengesthatblockchainof themostimportant cooperation willbeessentialtoovercoming some insufficient attention.More governmental and regulators isanarea currently receiving and internationalcooperationby governments ofimprovedthe criticalimportance national take placeatthegloballevel. Unfortunately, successful attempt at governing it will necessarily consequently, asignificantproportion ofany Blockchain isaglobal phenomenonand, cooperation global governance 157 Whatever

69 | THE MOWAT CENTRE 70 | INSIDE THE BLACK BLOCKS earlier about disabling certain contractualterms. earlier aboutdisablingcertain other jurisdictions–suchastheideamentioned requirements onblockchains thatoperatein laundering. activity thatuseit,suchastaxevasion ormoney governments tocombatundesirableformsof nature ofblockchain makes itdifficultfor Second, thedecentralized anddistributed problem. sectors aswell,worseninganalready serious combat jurisdictionalarbitrageby firmsinother blockchains may alsomake itmore difficultto making iteasiertomove value around digitally, firms, whichisaproblem initsownright.But,by to thebottomtakingplaceattractblockchain public interest. environments thatendupsacrificingthewider lower taxratesandincreasingly laxregulatory attempt toattractfirmsby enactinglowerand to thebottomamongjurisdictionsasthey This isalready encouragingasub-optimalrace where ahighercorporatetaxratewasineffect. were actuallygeneratedinasecondjurisdiction for afirmtodeclare profits inonejurisdiction that least onejurisdiction. is laundered through cryptocurrencies. Europol estimatesthatalready 3-4%ofcriminalrevenues inEurope economics/2018/04/26/crypto-money-laundering The Economist 161 TheEconomist. 26April,2018.“Cryptomoney-laundering.” plummet/?noredirect=on&utm_term=.1e9489353c71 com/business/2018/07/24/across-globe-taxes-corporations- plummet.” J. 24July, 2018.“Across theglobe,taxes oncorporations decades, from 49percent in1985to 24percent in2018.” Stein, rate globallyhasfallenby more than halfover thepastthree 160 Arecent studyfoundthat“Theaverage corporatetax beps.pdf issue. July 2018. 4-10% oftheglobalcorporateincometaxrevenue.” G20andOECD. 240 billionUSDinlostrevenue annually, whichistheequivalent to ofpractices “costcountries100- force estimatesthat thesesorts Development’s (OECD)BaseErosion andProfit Shifting(BEPS)task 159 TheOrganisation forEconomic Cooperation and 2017. 158 For amore in-depthdiscussionseeJohal,S.etal.30July, OECD. Robots, Revenues &Responses . The Washington Post Inclusive Framework onBEPS:Aglobalanswerto aglobal 160 http://www.oecd.org/tax/flyer-inclusive-framework-on- . 161 https://www.economist.com/finance-and- Italsomakes itdifficulttoimpose 159 There may already bearace 158 . Acommonexampleis https://www.washingtonpost. . Pages 33-35. . Theheadof . discussed inearliersubsections,governments methods forregulating activities“on-chain” as front aspossible.Thus, inadditiontodeveloping is workingtogetherandpresenting asuniteda The besthopegovernments have inthisregard character. because oftheirdistributed,even ephemeral, meaningful actionagainsttheseactivities countries willfinditextremely difficulttotake being usedforundesirableactivities,individual cooperation isunlikely tostopblockchains from networks. out ofnationalcurrencies andontoblockchain increasing amountoffinancialactivitymoves These challengeswillgrow asan inimportance content/ipfs-first-win-the-catalan-referendum/index.html the Catalanreferendum.” where andwhento vote. Dedi,D. 23October, 2017.“IPFS’sfirstwin: FileSystem (IPFS)toInterPlanetary disseminateinformationabout of howtheCatalangovernment usedadecentralized protocol, the disrupt theonlineaspectsofreferendum in Cataloniabecause 163 AgoodexamplewastheSpanish government’s inabilityto Pages 40-41. 162 Johal,S.etal.30July, 2017. perspectives andinterests are integratedinto without theirinput.To ensure thatCanadian and unilaterallyimposedonthemby others want tosimplyacceptstandards developed in abstract,Canadiancitizens are unlikely to having uniformstandards mightbedesirable impose orinducetheiracceptanceglobally. While and usetheirpowerinthephysicalworldto seek todevelop standards thatadvantage them power. Inotherwords, thesegovernments may entire networkby leveraging their“off-chain” preferred solutionsextraterritoriallyacross the governments andimposetheir for powerful totry enforce nationallaws,italsooffers opportunities blockchains makes itdifficulttonegatively Third, justasthenon-territorialnature of effectively “off-chain.” will alsoneedtoimprove theirabilitytocooperate 162 163 Whileeven perfect international CryptoInsider Robots, Revenues &Responses . https://cryptoinsider.com/ . . governance. for aninternationalconvention onblockchain problems orforpreparing andbuildingsupport dissemination of“modellaws”thataddress these as agoodforumforthedevelopment and Trade Law(UNCITRAL) couldpotentiallyserve For example,theUNCommissiononInternational and ensure they contributetothegreater good. contributing toproblems like tax-baseerosion, to thebottom,keep thesenewtechnologiesfrom framework thatcanhelplimitaregulatory race role inhelpingtocreate aconsistentinternational the UN,G20andotherscouldplay alarger will create. Internationalorganizations suchas collaboratively solve the problems that blockchain states inmultilateraldiscussionsonhowto Canada shouldalready beengaginglike-minded is probably notyet warranted,countrieslike While concrete internationalactiononblockchain vacuum. constructively tofilltheexistingregulatory in engagingotherinterested andworking parties governmental organizations needtobeproactive Canadian governments, firms andnon- the processes thatproduce thesestandards, See modellawsasthebasisfornationallaws. these expertly-drafted consultations withUNmemberstates. Statesare invitedto use working forUNCITRAL andonthebasisoforganization’s 165 Modelslawsare legislative draftsdeveloped by legal experts specific-recommendations-on-crypto cointelegraph.com/news/g20-forum-shelves-deadline-for-very- Specific Recommendations’onCrypto.” Suberg, W. 23July, 2018.“G20Forum Shelves Deadlinefor‘Very At themoment,G20hasnotyet taken anyconcrete steps: cigionline.org/sites/default/files/documents/PB%20no.101.pdf Digital Economy.” the G20:BuildinganInclusive, Transparent and Accountable 164 See,forinstance,Maupin,J.March 2017.“Blockchains and Standards Australia,isalready workingonten An ISOtechnicalcommittee(ISC/TC-307), ledby any internationalexercises instandard setting. interests andperspectives are represented in Additionally, Canadashouldensure thatits http://www.uncitral.org/uncitral/en/about_us.html 165 Policy Brief No.101. .

CIGI. CoinTelegraph https://www. . . https:// . 164

like Ethereum andBitcoin. around publicblockchains themostimportant with thegovernance discussionsoccurring also begintoexplore howthey mightinterface groups ofprivate firmsdevelop standards –and contexts–wherebeing donein“consortia” small get involved inthestandards development work really needtogetover theirunwillingnessto They suggestthatgovernmentsimportance. ISO process may, ultimately, beofonlymarginal be. Moreover, suggestedthe otherinterviewees not receiving asthey oughtto asmuchsupport this exercise butthattheCanadiansinvolved are hand sources, in thatCanadaisparticipating weunderstand,albeitfrominterviews, second- standards forblockchain andDLT. org/committee/6266604.html contracting. See identify management,andsmart 166 Theseincludestandards onprivacy, security, terminology, . 166 From our https://www.iso.

71 | THE MOWAT CENTRE Over the time that this paper was researched and written, the price of a single bitcoin has gone from about $1,200 to over $25,000 and is now back to about $10,500 (CAD). 72 | INSIDE THE BLACK THE INSIDE | 72 BLOCKS 7 1] Blockchain marksthe arrival ofthefirst of andneedtointegrateintotheirthinking: conclusions thatpolicymakers needtobeaware us tobelieve thatthere are three fundamental canbedifficult.Ourresearchimportant hasled fantastical speculations,identifyingwhatis proofs ofconcept,andenthusiastsoffering companies andgovernments announcingnew on interms so muchgoing of new ICOs launching, Blockchain canbe a complicatedtopicandwith Key Takeaways that isbeingplayed by hype intheblockchain sector. the three key thematictakeaways from ourresearch andby offering agentlewarningregarding therole exploration ofthisnewtechnologywithgreater confidence.Thus,weclosethisreport by summarizing understanding ofthekey conceptsandthebasicintellectualtoolsthey willneedtocontinuetheir blockchain oritsapplications.Whatitdoesaimtodoisprovide policymakers withafundamental As statedintheIntroduction, thisreport isnotdesignedtobeacomprehensive discussionof things thatitcannotdotoday. enable software todomanynewandimportant contracting mucheasier, blockchains will manipulate value andby helpingtomake smart areas. Byenablingsoftware tomore easily potentially revolutionary automationinnew system whichinturnlays thefoundationfor enable thecreation of a digitallynative value digitally native value system. CONCLUSION Blockchains Sebastopol, CA:O’Reilly. Page 62. 167 Swan,M.2015. 3] Themostsignificantimplicationsofblockchain 2] Blockchains anddistributedledgersalsooffer patient medicaldata, through vastly improved accesstoanonymized enabling massive medicalbreakthroughs the possibilityofblockchain-enhanced EHRs example, whencommentatorsgetexcited by only beoneofmanycontributinginputs.For often predict forblockchain, blockchain will revolutionary impacts thatcommentators emerging technologies. will arisefromitsinteractionswithother even distributionofpowerinthedigitalera. could helpsecure greater privacy anda more greater efficiencyanddecentralizationwhich of assets. information systemsandtrackingavariety ways oforganizingandcoordinating other lessrevolutionary, butstillsignificant, Theseimplementationswillenable Blockchain: Blueprint foraNewEconomy 167 thekey development For manyofthemost .

73 | THE MOWAT CENTRE 74 | INSIDE THE BLACK BLOCKS machine learningwere thenewhottopicsthat of yesterday’s news.At thattime,AIand already beguntoseeblockchain assomething our research project inearly2017,manyhad consider asweclosethispaper. Whenwebegan oneto The questionofhypeisanimportant Blinded by thehype? separate whatisreal from whatishype. prepared toasktherightquestionsand this newtechnologywillleave readers better fundamental conceptsandquestionsraisedby report. We hopethatthisreport’s analysisofthe the future butwhichare notcovered by this to blockchain thatwillgrow in inimportance Naturally, there are manyotherissuesrelated mania of December 2017-January 2018.Ithas mania ofDecember2017-January $12.00 risingtomore than$1,800inthecrypto- more 2017 atabout significantwithitstarting The fluctuationinthepriceofetherwaseven $25,000 andisnowbacktoabout$10,500(CAD). bitcoin hasgonefrom about$1,200toover was researched andwritten,thepriceofa single blockchain again.Over thetimethatthispaper and itseemedlike everyone wastalkingabout variety toexplode ofcryptocurrencies started then, inthefinalthird of2017,thepricea seen asincreasingly everyone wastalking about.Blockchain was response willneedtobeholistic. blockchain. Thus,anyeffective government the possibilitiesdescribedasbeingoffered by pattern willlikely bethesameacross manyof information andfacilitateaccesstoit.This blockchain technologywhichwillorganize the the discoveries justasmuchwiththe machine learningalgorithmsthatwillmake that willenablethisprobably lieswiththe passé and“so2015.” But org/w/index.php?curid=10547051 Wikimedia Commons Source: Kemp, J.27December, HypeCycle.svg. 2007.File:Gartner hypecycle The Gartner imperfect understandings, speculationandthe often buffeted by inflatedexpectationsbasedon bitcoin. At adeeperlevel, newtechnologiesare unconnected totheriseandfallofpricea well assomereal dangers,thatare completely Blockchain andDLT offer manybenefits, as distracted by thisspeculative rollercoaster. forpolicymakers important It isvery nottoget month. billion (USD)invalue worldwideinaboutone 2018wipedoutanastounding$500 January from theheightsofspeculationreached inearly and overall, thefallbacktolessinflatedprices well-known tokens have hadeven wilderrides since fallenbacktoabout$600. most-cryptocurrencies-to-hit-zero-goldman-says www.bloomberg.com/news/articles/2018-02-07/get-ready-for- Cryptocurrencies to HitZero, Goldman Says.” 169 Nishizawa,K.6February, 2018.“GetReadyforMost crypto/currencies 168 Allvalues asof25July, 2018.See as the“HypeCycle” illustratedinFigure 17. pattern haseven beenrecognized andformalized innovatorsthe mostvisionary cannotavoid. This simple inabilitytopredict thefuture thateven FIGURE 17 Visibility Technology Trigger 169 Peak of Inflated Expectations . . CCBY-SA 3.0. Trough of Disillusionment Slope of Enlightenment . https://commons.wikimedia. Plateau of Productivity https://ca.investing.com/ 168 Bloomberg Otherless . . Time https:// experimentation withthetechnology, helping attractive environment forinnovation, supporting including buildinginternalcapacity, fosteringan series ofstepsthatgovernments oughttotake, both categoriesofquestions,wehave outlineda own operations.To helppolicymakers answer forgovernmenttechnology mightserve inits concerns thepotentialusesthatthisnew the widereconomyandsociety. Thesecond the impactsthatthistechnologywillhave on that policymakers face.Thefirstconcerns categories ofblockchain-related questions As thisreport hasindicated,there are twomain and impactfulblockchain willactuallybe. tofindouthowuseful of Enlightenment”andstart years willlikely bewhenwemove ontothe“Slope Disillusionment.” of InflatedExpectations”andthe“Trough of point, however, issomewhere betweenthe“Peak we currently findourselves. Themostlikely technology –itishard tosay where onthisgraph muddied publicunderstandingoftheunderlying ICO-related financialspeculationwhichhas – largely onthebackofcryptocurrency- and up tomultiple“Peaks ofInflatedExpectations” Given thatblockchain seemstohave gyrated gartner-hype-cycle-for-emerging-technologies-2017/ https://www.gartner.com/smarterwithgartner/top-trends-in-the- HypeCycle forEmerging Technologies.”in theGartner positioning inthecycle. Panetta, K.15August, 2017. “Top Trends agrees withourassessment in termsofblockchain’s current 170 Gartner, thefirmthatdeveloped thehypecycle concept, their citizens andmaximize itsbenefits. to develop thecapacitytominimize itsthreats to govern it,andworkingwithothergovernments to fashionstandards andflexiblenewtoolsto 170 Thismeansthatthenextfew . Gartner.

governments findaway toovercome thisall-too- and cooperationitcanenable–mightjusthelp however, blockchain itself–andthetransparency with eachother, willendbadly. Fortuitously, well on anotherwithoutcommunicatingvery responsibility foronethingwhileanotherfocuses whereby orregulator onedepartment assumes terms. Theusualsiloedgovernment thinking, going torespond tothesetechnologiesin policymakers beabletothinkofhowthey are data andIoT. Becauseofthis,itisessentialthat technological developments suchasAI,big being inextricablylinked withotheremerging the challengesassociatedwithblockchain as essential itistothinkofboththebenefitsand In closing,weemphasize again justhow persistent badhabit.

75 | THE MOWAT CENTRE